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Edited Transcript of IMI.L earnings conference call or presentation 26-Jul-19 7:30am GMT

Half Year 2019 IMI PLC Earnings Call

Birmingham Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of IMI PLC earnings conference call or presentation Friday, July 26, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. Shook

IMI plc - Finance Director & Director

* Massimo Grassi

IMI plc - Divisional MD of IMI Precision Engineering

* Roy M. Twite

IMI plc - CEO & Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* David Alexander Larkam

Numis Securities Limited, Research Division - Analyst

* Edward Maravanyika

Citigroup Inc, Research Division - VP

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Matthew Spurr

Exane BNP Paribas, Research Division - Research Analyst

* Michael John Blogg

Investec Bank plc, Research Division - Capital Goods Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Roy M. Twite, IMI plc - CEO & Director [1]

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Right. Good morning. I'm really excited to stand here in front of you today to present IMI's half year results and my early thoughts around the strategy. This next phase for IMI will have a real emphasis on customers, market-led innovation and profitable growth. We're absolutely focused on improving our through-cycle financial performance.

So turning to the first half, it is pleasing to note that we came in absolutely in line with expectations. Cash delivery was strong, despite the continuing investments in the business. Precision has clearly been impacted by the weakness in Industrial Automation as we signaled in the IMS in May. And as a result, we will take cost action and have increased our expected restructuring cost to GBP 35 million this year, GBP 15 million of which will be spent on Precision. We now expect to drive GBP 30 million of annualized savings from these rationalization programs. Critical orders were up 19% in the first half and margins were robust in the face of the expected reductions in sales. Hydronic also made good progress on improving its margins and rebounded well from a poor first half last year. For IMI, we've absolutely put the customer at the center of our decision-making and have already started a series of profitable growth improvement initiatives. Our strategic review is also well underway, and I'll give you more color on that later in this presentation.

So with that, I'll hand over to Dan, before coming back to you to talk about our immediate improvement actions and our initial thoughts around our strategy.

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Daniel J. Shook, IMI plc - Finance Director & Director [2]

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Thank you, Roy. Good morning, everyone. Very pleased to be able to take you through the half year results today. As Roy already said, our results are in line with expectation and cash delivery was particularly strong. Now you'll all be aware of the new accounting standard releases and given there is no restatement of 2018, the organic metrics presented will be based on figures before the lease change, but I will give you a summary slide with all the changes so you can see the impact as we fully transition to the new standard.

So you'll see on this slide the detail of our results on both an adjusted and organic constant currency basis. In terms of revenue, we had a positive exchange rate impact of GBP 13 million or 1%, driven primarily by the strengthening of the U.S. dollar. The M&A adjustment shown on the slide reflects the January 2018 Bimba performance ahead of the acquisition.

On an organic basis, revenue of GBP 910 million decreased 3%, making adjusted revenue down by 1%. Adjusted operating profit was GBP 118 million when compared to GBP 120 million in 2018. On an organic basis, operating profit decreased by 4% and when you include Bimba and FX, adjusted profits reduced by 1%. The profit margin at 13% was slightly lower than last year. Corporate cost of GBP 15.5 million were higher by GBP 2 million due to GBP 1 million of one-off benefits in the prior year and a GBP 1 million impact from the lease accounting change.

So let me give you the key bridging items for the lease accounting change. In line with the pro forma slide presented in March, we have a slight improvement in overall operating profit, offset by higher interest expense. In addition, we're stopping the practice of charging a notional rent to those sites with owned facilities. This lifts the divisional profits at the expense of corporate costs. The revised corporate cost figure gives you a good run rate for the charge going forward. The right-of-use asset and corresponding debt figure is GBP 91 million at June 30. This figure will move around a bit as leases roll off and are renewed. But the overall impact to our key financial ratio, net debt-to-EBITDA, will be limited.

So moving to the detailed income statement, this slide provides the 2019 results under the new accounting standard. Our interest charge is higher due firstly to the accounting change shown on the previous slide but also to the full period effect of terming out the Bimba debt. Restructuring costs totaled GBP 12.5 million in the first half. The majority of this was incurred in Critical, where the division continues to rightsize its European footprint in light of the structural decline in Fossil Power. Roughly GBP 4 million was incurred in Precision as the division addresses its European cost base in light of the market downturn and its site footprint in the Americas as part of the Bimba integration.

Overall, we expect the full year charge for 2019 to be roughly GBP 35 million as additional actions will be undertaken to ensure the group proactively adjusts its structure to improve its long-term competitive position. This will include further footprint optimization as well as cost initiatives that will result in a flatter organization, which will drive greater accountability right through to the local leadership. The restructuring actions will support the 2019 results by roughly GBP 20 million, with an annualized impact of GBP 30 million.

Moving to operating cash flow, this slide again shows the 2019 figures after the accounting change. You will see that working capital increase of GBP 25 million was GBP 35 million favorable to the prior year, driven primarily by significant improvement in debtors. While some of this reflects order and sales timing, the group has been successful in driving the balance lower and reducing overall debtor days by 3. Capital expenditure of GBP 28 million reflects a GBP 5 million increase from last year, which is largely due to the construction of a new facility for Critical in Japan. You'll recall that the funding for this new plant was fully provided by the sale of the existing older facility. Overall adjusted operating cash flow of GBP 101 million improved significantly from GBP 68 million in 2018.

Regarding net cash flow, you'll see that the improvement in operating cash largely flows through. Cash generation at GBP 64 million is improved by GBP 37 million and net cash flow improves a similar amount when adjusting for the Bimba purchase in 2018. The net cash outflow of GBP 15 million reflects a GBP 70 million dividend payment in May and when combined with the GBP 91 million debt adjustment for lease liabilities, results in a net debt GBP 516 million. Excluding the lease adjustment, year-over-year debt reduced by GBP 34 million.

So turning to the balance sheet, despite the additional debt from the lease accounting change, IMI continues to maintain its solid position with sufficient headroom for further M&A activity. As expected, the lease adjustment led to a small increase in net debt-to-EBITDA to 1.5x. Our expectation is for that ratio to reduce in the second half of the year. I should mention that our standard pension update and foreign exchange ready reckoner slides as included as appendices in your presentation. Our pension position continues to improve through proactive management and the ready reckoner provides you with adjustment factors for both the dollar and the euro.

Right. So getting into the detailed performance of each division, starting with Precision. You'll recall that Precision includes Norgren and Bimba and provides a range of specialist valve, actuation and flow control technologies for applications where precision, speed and reliability are essential to the processes in which they're involved. Revenue of GBP 463 million was 3% higher than the first half of 2018 and after including an additional month of Bimba and GBP 10 million of forex benefit, 1% lower on an organic basis. The reduction was all down to the continued slowing of the Industrial Automation segment since the beginning of the year.

Asia sales were flat in this segment, while both Europe and Americas saw declines in IA. The division's other verticals all continued with good growth, with Energy being particularly strong in the first half.

Operating profit of GBP 75 million was in line with 2018 and when excluding FX, the extra Bimba month and lease accounting changes, 4% lower than the prior year. Lower volumes combined with the mix effect from reduced Industrial Automation led to the profit decline and resulted in margins of 16.2% versus 16.7% last year. In terms of outlook for the division for the year, based on the global industrial outlook, we still expect full year organic revenues and margins to be slightly lower than 2018.

Next up is Critical, which you will be aware, develop valves, actuators and controls capable of operating at the extremes of temperature and pressure for the most demanding industrial applications. Order input in the first half of the year at GBP 358 million was 19% higher on an organic basis and included robust growth across a number of our subsegments. New construction orders at GBP 179 million were 36% higher than the first half of 2018. Oil & Gas orders returned to growth, supported by contract wins in what we expect to be the next LNG investment wave. Our Fossil Power orders reflect a market that remains in decline, although we continue to win the most attractive opportunities available.

On top of the good wins in LNG and Petrochemical, the division's ability to develop new markets and applications has underpinned the first half orders as significant growth was achieved in both the marine and water segments. In Aftermarket, order input of GBP 179 million was 5% higher, with both the Petrochemical and Nuclear segments performing well. Spare parts were up 4%, while upgrade orders were down 3% against a very tough comparator last year. The order book at the end of June was GBP 538 million, reflecting an increase of 10% versus the same point last year.

Looking at revenue, as expected, Critical delivered lower overall sales in line with the order book phasing from last year. Revenue of GBP 294 million was 9% lower on an organic basis and when including GBP 4 million of currency benefit, 8% lower on an adjusted basis when compared to the first half of 2018. New construction sales of GBP 124 million were 28% lower, largely in line with the orders received in the first half of last year.

Aftermarket sales of GBP 170 million were 12% higher, led by upgrade valve sales of the back of our focused initiative in 2018. Importantly, Power aftermarket sales grew by 7% as the installed base continues to provide maintenance and spare part opportunities.

Operating profit was GBP 33 million in the first half, which although was a reduction of GBP 4 million organically, meant that the division was able to maintain operating margins largely flat to the prior year despite the top line reduction. This was an excellent outcome and reflects the division's continued execution of its restructuring, cost containment and Value Engineering initiatives.

In terms of outlook for the full year, we continue to expect that volumes will be about 7% lower, broadly consistent with the closing order book of 2018. We expect second half margins to be higher than last year because of the increased aftermarket sales and the benefits of restructuring.

And turning now to Hydronic, which includes 3 industry recognized names: Heimeier, TA and Pneumatex, and is a leading provider of water-based heating and cooling systems for both the residential and commercial sectors. Revenue of GBP 153 million was 4% higher on an adjusted basis and after a limited FX impact also 4% higher on an organic basis. The division's core Nordic and German markets continue to perform well. Sales of TA balancing and control increased 2%, with good growth in Europe offsetting the impact of exiting the noncore Turkish market last year. Sales of Heimeier thermostatic control products were 5% higher against a weak prior year comparator. And sales of Pneumatex water quality products increased 6%.

Operating profit of GBP 26 million was 11% higher on an organic basis, resulting in a 160 basis point improvement in operating margins to 16.7%. The division's focus remains on rebuilding margin through profitable growth initiatives. Regarding outlook in the full year, we expect to deliver improved sales, profits and margins when compared to 2018.

So now turning to the outlook for the group for the rest of the year. As previously mentioned, our trading outlook remains substantially unchanged. In the second half of 2019, we continue to expect that organic revenue will experience a decline similar to that of the first half when compared to the same period in 2018. Nonetheless, second half profits are expected to be similar to last year, supported by the business improvement initiatives pursued by each of the 3 divisions. Based on current market conditions, we anticipate full year 2019 results will be in line with expectations.

And with that, let me turn back to Roy for an update on the strategic initiatives.

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Roy M. Twite, IMI plc - CEO & Director [3]

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Thank you, Dan. As most of you know, I have been at IMI for over 30 years and I know each of the divisions intimately, with a good sense of their strengths and their weaknesses. But it's also refreshing to be able to look at this business through a different lens. The lens of a new Chief Executive. I don't certainly come to this role with preconceptions on the future shape of the business. But there is clearly more that the divisions can do together to unlock real value.

So today, I want to give you my initial observations on the business and the immediate priorities to deliver an uplift in group margins in the short to medium term. I'll also explain, our new process to drive market-led innovation and sustainable, profitable growth, including IMI's growth accelerator. And finally, I will give you my initial thoughts around our strategic review and some areas that require more analysis and review before we come back to you in February next year.

So turning to IMI's strengths, we have great people and an embedded can-do continuous improvement culture. We have some really strong brands and market positions, our industry-leading engineering expertise and application knowledge is most often our competitive advantage. We have added a real lean capability over the last 5 years and in several of our operations are operating at world-class capability. We also have an excellent new product introduction process and a strong balance sheet, which gives us good growth optionality, which we will obviously only be using in a disciplined way.

But there are also clear opportunities to improve. There is much more that we can do to put customers right at the center of our decision-making to drive faster growth. And over time, we will use our balance sheet to move IMI into more attractive market segments, which are underpinned by very strong long-term growth drivers. We need to deliver better financial results from our lean program. We have built the culture, we have thought the lean tools, and now we need to drive performance right through the whole supply chain. We have a clear opportunity to further reduce complexity to flatten some organizational structures, decentralize and drive SG&A efficiency. It is fundamentally important to me in that in doing so, we increase our accountability all the way through our organization and sharpen up our commercial skills.

Against this backdrop, we have to face the fact that margins have declined over the last 5 years, mainly due to some very tough markets in Critical Engineering as well as investment right across IMI. But I fully believe that now is the time to capitalize on all of our hard work and the investments that we've made. We are focusing the organization on delivering for our customers, generating sustainable margin improvement, profitable growth and improving through-cycle shareholder returns.

And as you can see from this next slide, we're certainly not waiting for the results of our strategic review. We have initiated our near-term actions to accelerate profitable growth. Each division is driving specific sales growth initiatives, while fully utilizing IMI's shared core capabilities of Value Engineering, material cost reduction and productivity improvement. But in addition, and this is important, we have ramped up our smart pricing and overhead efficiency in programs and the collaboration between the divisions in these 5 core areas is now exceptional, with best practice being spread freely and applied widely. For example, Critical Engineering has honed the Value Engineering process over the last few years to substantially improve its competitive position. And this division is now leading the dissemination of Value Engineering best practice right across IMI.

And on top of these near-term actions, we are building a whole new capability of market-led innovation. We call this IMI's growth accelerator. We have piloted this processes in Critical Engineering and are rolling them out across Precision and Hydronic in the second half of the year. We are creating diverse sprint teams that work at pace to solve significant industry problems, which will create very significant value if these problems are successfully solved. The teams work quickly, produce minimum viable proposition so that they can cost-effectively test whether IMI's proposed solution actually solves the problem. In just 100 days, there are typically 6 test and learn cycles with massive customer interaction.

The customer interaction helps us iterate and improve IMI solution. The teams then pitch the problem, they pitch the solution and the value created as well as the business case to the divisional executive to get funding. But even unsuccessful ideas rapidly build organizational knowledge, create a customer-focused culture and actually could be filtered out with very little investment. From the initial 7 pilot teams in Critical, I can say that the energy created, the level of customer interaction and the innovation generated has been unprecedented in my 30 years at IMI. But obviously, we're at a very early stage in using these processes to develop a brand-new, outward-looking, customer-centric culture of innovation in IMI.

In addition to IMI's growth accelerator, we have already realigned the reporting in the divisions to improve accountability and to drive growth. One of my absolutely fundamental management philosophies is that quality feedback drives performance improvements. And I want everybody in IMI to know how well they are contributing to our company's success. We have also moved more of the central resources like business development into the divisions and are reducing our corporate scale and cost. To accelerate this process of improved accountability, we have recently set up training boot camps for general managers to ensure that they learn how to optimize customer service, how to better understand the financials and how to successfully pull the levers for profitable growth. The DMDs and I are personally involved in the training, along with the very best experts that we have across the business to give us an adrenaline shot of commercial excellence.

Our detailed strategy reviews are progressing well. Turning to Precision first, we have confirmed the division's strengths through a detailed study of the data. Precision has globally recognized brands, established routes to market, applications engineering and customer-configured specials capability. Precision obviously has access to some of IMI's most attractive end markets, including industrial automation and life sciences as well as a good stream of aftermarket business at very attractive margins. Precision also has an industry-leading web store as well as good financial returns and cash conversion. But analysis of the data in Precision also gives us a cause to stop and to think. For example, we are looking again at which Industrial Automation segments should we prioritize for long-term growth and what can we do to effectively manage the remaining complexity within Precision. We're already working to answer these questions and optimize our position.

So moving on to Critical, its strengths include its globally recognized brands, it's industry-leading engineering capability and applications knowledge, exemplified by the support that we give to our customers through the globally renowned Valve Doctor program. Critical also has a strong, resilient and profitable aftermarket annuity. Over the last 5 years, we have rapidly improved the operations in Critical and we now have many world-class factories right in the heart of the fastest-growing markets. The business also has good forward visibility with its 9-month order book and real strength in the attractive LNG market. The key consideration for IMI Critical is that although it's been transformed from being a predominantly Fossil and Nuclear Power business a decade or so ago, still 13% of IMI Critical's orders were new construction fossil power in 2018 and that market is still declining. We intend to make the most of the upcoming LNG activity and over time, convert our anticipated project wins into stronger divisional margins. The key work stream in Critical is to evaluate the opportunity to use its first-class engineering skills in new market segments to align its Fossil Power cost base with the new market reality as well as reviewing the product portfolio.

IMI Hydronic is a tremendous business, with great market positions, very strong brands and the benefit of decades of customer training, which has created a very strong customer pool model. The Hydronic college helps optimize the whole system for customers, reducing their energy cost, minimizing their capital costs and improving the accuracy of the HVAC system. Hydronic also now has some industry-leading operations, with a passion for continuous improvement, strong cash generation and margin potential and has been very resilient, even through the deepest of recessions. But the biggest consideration for IMI Hydronic is clearly its lack of growth over the last decade. And we will be working very hard over the next 6 months to establish how we can win in attractive adjacent markets to sustainably grow this business. For a relatively small division, Hydronic also has too much supply chain complexity, which we are addressing.

So the next steps in our profitable growth acceleration journey are crystal clear. Right now, we are pulling the levers in the division to drive financial performance improvement. We're putting customers right at the center of our actions and flattening structures to help drive accountability right through the organization. We are also starting a journey to assess the true potential at each of our divisions against our profitable growth ambitions. All of this will drive a through-cycle sustainable improvement in our margins, free cash flow and return on capital. In February, I expect to be able to give you further insights on the strategy and an update on the execution of our profitable growth improvement plans.

So with that, we can open up for questions. If you do have a question, please put your hand up, remember to give your name and your company name when you receive the microphone.

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Questions and Answers

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [1]

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Andy from JP Morgan. I just got two. First one might be easier. That on the LNG, you obviously, talked about that being an ambition in terms of expanding there, can you just talk about what you're actually seeing in that market? It feels like the news was being generally improving or at least it's impacted you on the ground, but just interested I guess to get an update on that.

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Roy M. Twite, IMI plc - CEO & Director [2]

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Andy, so LNG, obviously we've been waiting for a few years now for LNG to come back. I think I'll remind you that at the peak of the last cycle, LNG new construction orders were about GBP 70 million for Critical, so it's a big deal. And also the Aftermarket for LNG is very, very strong, very profitable. What we see right now is that in the first half, our orders doubled in LNG. I think for the full year that we will be able to double last year's orders in LNG. The pipeline itself, I would describe is strong, so we are tracking over GBP 500 million worth of orders, which would obviously, come over the next 4 or 5 years, depending on whether those orders actually receive final investment. So the pipeline is much stronger than it's been, Andy, for years. We won our first major LNG project of that new pipeline in Canada, and it was a great result from Jackie and the team. So we're really pleased with that.

So pretty optimistic at the moment about LNG. Clearly, gas prices on the other hand are lower and that will impact I'm sure, investment decisions, but in terms of projects at the moment, we're seeing a quite a lot of momentum.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [3]

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And I guess just on a different topic, you have given quite a lot of, I think, sort of strategic commentary there, probably more than we were expecting. What I'm interested in is you said so many of the businesses that you guys see kind of come back around the business there's like quite a lot of business, quite advanced. What's been the biggest surprise in terms of how and what you're expecting versus what you're seeing? Because you have outlined quite a lot, I think, happening there, which feels like there's quite a lot of momentum, which to me, suggests that you've actually been quite proactive in terms of getting on with things already.

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Roy M. Twite, IMI plc - CEO & Director [4]

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Yes. I mean I've had great visits with Massimo, we went right across Central Europe, we went down to the East Coast of the U.S. and down to Mexico, it was a great set of visits. And obviously, been to Hydronics, we went out to Copenhagen, Sweden obviously have seen all the critical factories recently. So yes, we've traveled quite a big chunk of the business already. And I think -- I mean, Critical was being completely disrupted obviously, with what's happened to Fossil Power and then Nuclear Power and then obviously, oil and gas recession, and it's been a complete disruption. So Critical has had to push from fossil power into petrochem and now into naval and nuclear as you can see from the numbers. So we've had to sort of really move that business as fast as we can into better sectors.

For Precision, the reassuring thing is that a lot of the customers, same customers that I knew, Massimo has been visiting in the period recently. And the sort of markets structurally are quite similar to how I understood them. I think that Precision has done great work in terms of its factories and then Hydronic is just as good, if not better. So the factories, the operational footprint, the operational capability, Andy, is really in good shape. The opportunity as I was indicating is definitely on the front end, on the commercial side. So really step up our commercial capability. We've been training the general managers. Only on Wednesday, we had about 40 people was it, Massimo, we had in the room? So really start to say I think this is what we expect of you your role. It's not just an operational role, we don't just expect stocks, we expect you to look at the whole business and optimize it from a commercial perspective.

And two things that are coming out of that pretty quickly, one is smart pricing. So some of you remember, traditionally we've been very good at smart pricing. There is a clear opportunity in Precision. If we just take Precision Europe, something like 90% of the sales are 15,000 part numbers. The last 10% percent of the sales are more than 20,000 part numbers in Precision Europe. So you can see that long tail. Now if we try and cut that tail off, customers will go berserk, but it's clearly a pricing opportunity. And that's what Massimo has jumped on and we're moving pretty quickly on.

So I think the commercial aspect plus you can see our restructuring, Andy, has gone up now from GBP 20 million to GBP 35 million. Most of the extra GBP 15 million is in Precision, and again Massimo and the team have looked at the cycle and said, okay, this is clearly coming down when you look at the P&Is. Sally has done a tremendous job of the analytics and plotted against all the previous recessions. We talked to customers. We think we got a pretty good idea fairly early where this was going and now we're taking actions to make sure that our costs are aligned with our activities.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [5]

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It's Robert from Morgan Stanley. Couple of questions. So you mentioned the returns and the margin targets, what about growth? How would you sort of view the growth profile of these businesses over the medium term? Obviously, you mentioned Oil & Gas had a pretty tough time, really how do you get at a group level organic growth going again at IMI?

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Roy M. Twite, IMI plc - CEO & Director [6]

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Robert, well clearly, the growth accelerated processes are brand new to IMI. So in my 30 years at IMI, one of the things I was really looking to understand is how you unlock market-led innovation in a more meaningful way. So most of the businesses that we have, have a long track record. I mean remember, IMI can trace its roots back to nearly 160 years. Most of the businesses that we bought Norgren, CCI, CA have had a history of creating the new balancing valve or the new lubricator, which gave tremendous growth over many, many decades and it's indeed, still giving tremendous growth.

What we've done over the last 5 years is protect our core business. A lot of the new products has been much more competitive versions of our existing product, which is good because our core business as you know, is highly profitable.

What we're doing now with the growth accelerator is looking to solve industry problems and create genuinely new product with high differentiation, which will create growth. Now that will take time, which is why I'm saying because obviously, innovation takes time to bring through to market. But if you want to say, over a longer period for the long-term investors, which there are plenty is the way that we will step up organic growth. We are also looking to, as you can see lean on the well-established processes, like Value Engineering, right across the divisions to improve the competitiveness or continue to improve the competitiveness I should say, of the existing businesses, and we will be clearly looking for acquisitions that take us into more attractive places. So this was always the struggle in Critical, is how do we move even faster into more attractive adjacent markets, where we can use the engineering skills and the severe service valve skills, fluid dynamic skills in more attractive segments, Robert. And that is what will start to push it.

Clearly, in Precision, we have some of the most attractive end markets. So there is more a question of saying okay, out of the 12 segments in Industrial Automation, which of those can we win over the long term? And that's what we're looking at. Plus, we think we can generate a differential advantage through service in Precision, partly through its digital aftermarket model, Norgren Express and partly through better customer service and more bespoke customer service through its applications engineering capability. So that's what we think about in terms of Precision.

In Hydronic, it's -- we are going to improve the margins over the next couple of years. And we think a clear pathway to do that, so we carved out some growth in the first half but that was against an easy comparator. Structural growth in Hydronics, again will come from moving more and more of the business into adjacencies, areas like radiant heating, which are growing quickly, using the strong brands, using the routes to market, which is super strong as you know to take this into those spaces. Again, new products and acquisition will both be used to do that.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [7]

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Great. Maybe just one follow-up. It's just really on the -- I guess the mix of the business as well over the medium term. How do you see IMI in, I guess, 5 years' time? Is it that the profitable business is pretty much nonexistent other than the legacy aftermarket?

Do you -- what's your view on Hydronic over the medium term has, I guess, has been a drag on group growth for a while? Do you realistically see being able to turn that around? Or is that just sort of kind of margin recovery story more than anything else?

I guess, over the improvement you are targeting, how much of this is coming from a pullback on the spending that you've been making over the last few years to try and accelerate growth and just kind of reaping the benefits from that activity that you've been doing for last few years?

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Roy M. Twite, IMI plc - CEO & Director [8]

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Specifically in Hydronic, Robert?

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [9]

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I guess at the group level on margins, specifically how much is coming from stepping back on the spending that you have been making in the last few years?

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Roy M. Twite, IMI plc - CEO & Director [10]

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Yes. No, really good point. So okay, let's take Hydronic first, it's true, if I go back to when I was in Hydronic, it was growing quite nicely and what strategy were we using, we focused on Europe, we used the strong brand and we released a lot of new products. So we look to the hydronic circuit, and we said, what else are the consultants actually specifying because those were a bit differentiated. There are lots of products in a hydronic circuit, but a lot of them are commoditized. And then we acquired companies, like one in Slovenia, to add to the package of what we could offer through our established route to market.

What we're doing today is a very similar approach now, and that's what it feels looking at, but moving us into the new growth areas as I said of ready in heating So I -- what I love about Hydronic is what is say, I love its margins, in fact if you look at Hydronic, we looked at it over the last 15 years, it's averaged about 19% margins. So there is no fundamental reason we don't believe, as I said the customers are pretty stable, the markets are lovely and stable, why we can't improve the margins. To make it grow, we've obviously got to move using these brands into areas that are faster growing than radiator valves and some of those other areas, Robert. That's absolutely clear to us. We've got a range of options, we're now using the sprint teams to explore those markets as rapid as we can to assess the group -- the real growth potential as I say. So that's the approach to Hydronic. And then just -- so your question on growth, so I thought you were talking about Hydronic, can just clarify that one for me, please?

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [11]

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Yes. I guess as you obviously, went through a number of years where you have ramping up spending to try and get new products brought into market, I guess how much of your margin improvement is coming from that action?

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Roy M. Twite, IMI plc - CEO & Director [12]

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Almost nothing, almost nothing. So most of the margin improvements, so if we look at what we're going to spend the GBP 35 million on, most of that is in Critical, moving, closing down our Swedish project management center and moving that to Bopp & Reuther, the capability to Bopp and Reuther. Moving the manufacturing from Bopp & Reuther to the Czech Republic, so that's a nice structural, two structural changes that we'll -- and absolutely, nothing to do with investment.

In Precision, what Massimo is doing is one, moving more manufacturing from the high-cost countries to the best cost countries like the Czech Republic. And looking at some SG&A complexity, but certainly not reducing the focus on new products. On new products as I said, most of what we've done is improved what we've got, so we've now got an excellent actuator, we've got an excellent FRL, that means build these regulators and lubricators. But what we need to do now is really create more differentiation using that new product introduction process. So if anything, we are pushing more investment towards the front end of the business because we're dedicating sprint teams to customer interaction and creation of innovation. And what we're insisting on in our lean program is that it generates either a benefit for customers or a financial performance improvement and that we can see in our metrics, otherwise, we're not doing it.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [13]

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It's Andy Douglas from Jefferies. I have four, hopefully, quick questions. You talked a lot about commercial skills, sharpening those up and from what you said, maybe it doesn't come naturally to all the people who are maybe a bit more operationally focused. Is there a risk that we need a bit more investments in people? Do you have that commercial kind of acumen across the group? And I'm interested in kind of what your thoughts are. I mean, hopefully, the answer is no but interested nonetheless.

On Critical, you talk about a product portfolio review, is that reducing kind of things that you do at the moment because markets are shifting? And then does that require kind of products moving them into new markets like naval. You've moved into semi sever as of time. Is there another kind of leg of that?

On Precision, as said before, if things do get a bit trickier, I'm just wondering how many more levers you got to pull. I've noticed you've done more in Critical where we thought you carved almost -- have done all your stuff, but is there more to do in Precision?

And then lastly on Precision, and unless I'm being really stupid, on the slide, it looks like Bimba have GBP 9 million of sales and GBP 0.3 million of EBIT, which isn't...

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Daniel J. Shook, IMI plc - Finance Director & Director [14]

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January before we bought it. That's the adjustment to get to inorganic. Yes, don't read any -- I mean that was months right before we acquired those.

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Roy M. Twite, IMI plc - CEO & Director [15]

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Yes. If I take the other three questions then, so commercial people -- yes, we don't -- we won't add to the cost base. We see opportunity, just streamline SG&A, Andy. What we are doing is starting with some of the great people we got and training them as I said. So Massimo and I spent some good quality time on Wednesday with 40 people across Precision, actually there was a couple in there from Hydronic and a couple in there from Critical as well because we're going to look how we can move this program across the rest of the divisions. So we're not talking about extra people, we think we can reduce SG&A cost in general. I'd love to make sure that we could train as many of the people we got, that's my absolute ambition. Obviously, if some of those people don't make it and can't step up to the commercial capability then obviously, we have to recruit some people from the outside as replacements but we won't be adding to overall cost.

In terms of Critical, yes, I'm pleased with Critical that it's been able to double the amount of product that it gets on a naval nuclear submarine. And that was a really good work in Critical. Jackie and I had a call with a customer a couple of weeks ago and there's big opportunity there. So what you see I think, the order book is 5x times the first half of last year. It will be lumpy, you either build a submarine or you don't, but it was nice to see that we've been able to do that.

And there are other areas, so we've done a complete survey already now, actually. All the other areas where severe service balancing used, where we don't really play, but there is an opportunity potentially to use our engineering skills. So we're exploring those in two ways. One is through the sprint teams and two is obviously, acquisitions. And what I love I is a sort of small- to medium-size acquisition that could help Critical move faster into some of those better long-term markets, absolutely.

And then in terms of Precision levers, I think Massimo is licking his lips because I think as we went across the business, there is opportunity around, Massimo and we're excited about it. We've got 34 sites in Precision, and we have been looking at footprint, we've been looking at our capabilities, we've been looking at the opportunity in smart pricing as I said. Massimo has turbocharged the material cost reduction part of that now and we've got an excellent Persian director that's really driving the whole agenda there. So I think yes, we see opportunity in Precision, clearly the cycle is tough, I need to say that right. And as we said, we saw that coming and Massimo has got ahead of that, and that's partly what we're doing to make sure our cost are aligning with activity. Does that answer your question, Andy? Yes? Thanks.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [16]

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Michael Blogg from Investec. Two questions, the first one is on Critical Engineering, the downturn in Fossil Fuels power orders, is that uniform across coal, oil & gas? Or is gas a little bit better than that implies?

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Roy M. Twite, IMI plc - CEO & Director [17]

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Gas is not very good. I mean, let me -- to give you a whole picture, I mean, our fossil power new construction orders harp in those numbers. So even though orders overall were 19% up, was it 13% I said last year of our total orders were new construction Fossil Power? This year, it could easily be half of that again, Michael, for the sort of third year running. Everybody keeps talking about gas, we haven't seen the orders, and I think that's been a consistent story for the last 3 years. We'd love it to come back on the back of renewables energy as part of the cycling equation, it doesn't seem to be in our experience.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [18]

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Going back to the -- are you aware of just investment decisions, which are sort of pending? Or is it -- is the outlook just moribund?

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Roy M. Twite, IMI plc - CEO & Director [19]

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It's -- it draw some projects. Again, I wouldn't put it any more than half of last year's activity. The activity that there is tends to be in Asia as you'd expect. And what I'm pleased about is that in the aftermarket, we've found a way to carve out some growth again in Fossil Power. I think the Aftermarket was over 5% up again, and that's down to Jackie and the team, really going after upgrade valves, going after making sure that all the customers have got the parts they need before they shut down in a very, very systematic way. The new construction Michael, I don't think that is coming back anytime soon.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [20]

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Okay. The other one is on Precision, remembering back 5 years or so, we had a diagram showing the supply chain how complex it was, arrows basically going everywhere. How far through that since inflation process are you? Because I hear you saying that there is still more to do, but where are you against the ambition to the quarter?

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Roy M. Twite, IMI plc - CEO & Director [21]

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Yes. I mean Massimo has made some good progress in places like Asia, so we've been localizing in China, which has been important to us and there is more to do there, Michael. In terms of the rest of the business because we bought Bimba, remember Bimba came with 9 sites on its own, so despite everything we've done previous to that, we've now put in another 9 sites. So clearly as I said, we've got 34 sites in that manufacturing footprint. Some of the ones that have really made good progress operationally nice and strong now. And Massimo indeed has put new ERP system right across the Americas. So our foundations are much stronger to allow us to sort of go to the next level now I say, Michael. So progress, I would say we were no more than 1/3 of the way through what we can do in Precision. I don't know, Massimo, if you'd disagree with that. I mean is...

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Massimo Grassi, IMI plc - Divisional MD of IMI Precision Engineering [22]

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Completely agree, Michael. Probably what I would like to add to what you said Roy is that, we built a new plant in India. So clearly, there is a desire to move our -- I mean to increase our activities in best cost countries and to support the local market with locally manufactured goods, but as Roy said, we still have a lot of opportunity that that's something we are very seriously considering now.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [23]

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Trying to go through the other 2 on business inflation.

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Roy M. Twite, IMI plc - CEO & Director [24]

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Yes. I mean, it's complex as you know, I don't want to break it or that will be a nightmare. As you know, I spent more than half of my career in Precision, it's fundamentally a very good company. And certainly through the cycle, I believe we can improve the margins. You can't defy gravity but we can do that, Michael. So -- but we will systematically and at the moment as part of the strategic process, we are systematically looking at what makes sense in terms of supply chain complexity, and we will make sure that we will deliver that over the next 5 years. It will be complex but we will deliver that.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [25]

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And is capacity utilization at the end of this period higher than it was 12 months ago?

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Roy M. Twite, IMI plc - CEO & Director [26]

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Is it higher than it was 12 months ago? I would say right now, I mean, Massimo is shutting a site right now, actually. But I would say at the moment, our overhead under recovery is a bit higher than it was this time 12 months ago, so we probably have similar levels of capacity utilization, maybe slightly less. And Massimo, you put that at something like 70%, wouldn't you?

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Massimo Grassi, IMI plc - Divisional MD of IMI Precision Engineering [27]

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70%. Yes.

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Unidentified Analyst, [28]

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David from Bank of America. Quick one for you, Roy. I think you've given a good early flavor of what you've got in store. And clearly, lean manufacturing, Value Engineering are still a key focus for you. What are you doing that's different as opposed to 6 or 12 months ago on the mark? And has your view kind of changed since you've taken on the role?

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Roy M. Twite, IMI plc - CEO & Director [29]

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Yes. I mean two words, commercial focus. We spent these years rebuilding the operations, making them much, much more competitive. Now is the opportunity to really concentrate focus on the customer, focus on servicing the customer to generate growth, bringing through more innovation, but also making sure commercially that right across our business, we're making good returns. And that's how I would summarize it.

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Unidentified Analyst, [30]

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And then a quick follow-up. Commercial Vehicle was I think fairly stable in Q2 and continue from a reasonably good trend in Q1. Speaking to customers and looking at the lead indicators, specifically in U.S. heavy truck, 2020 looks like it might be a bit of a more challenging year. Firstly, how much visibility do you guys have on that? And Massimo, I suppose, how quickly can you take costs out next year if we do have a slowdown in the cycle?

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Roy M. Twite, IMI plc - CEO & Director [31]

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Yes. I'll start and then Massimo can make some comments on. So Massimo is already planning on a reduced second half in terms of Commercial Vehicle because the thing is with Commercial Vehicle, even though Massimo was with one of the customers we've got 2 weeks ago, their ability to tell us is obviously constrained by the nature that they're a public company. So it tends to hit us very quickly. So we have to watch the external data pretty closely, David. So Massimo is obviously doing that.

In terms of next year, we won't have any more visibility than you in other words, but I don't know if you want to make any comments, Massimo on...

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Massimo Grassi, IMI plc - Divisional MD of IMI Precision Engineering [32]

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Unfortunately, David, it's -- as Roy said, it's what we can see for the moment both in terms of search is available and feedback from our customers, everybody is expecting a slowdown, potentially a very important slowdown. So for the moment, we have tried to collect all these inputs but we are certainly prepared for the rest of 2019 and we are working on preparing 2020. Now we know we approved that NCV we acquired. I mean we have been able to flex our cost depending upon volume, and we're working actively to have the best possible estimate for next year.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [33]

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David Larkam from Numis. Just on the restructuring, how much of that GBP 35 million is cash? And of the GBP 20 million this year, how much, if any, was in the first half of the savings?

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Daniel J. Shook, IMI plc - Finance Director & Director [34]

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Most of it will be cash, David, because it's very much around our general SG&A, maybe GBP 2 million to GBP 3 million will be noncash. And about 1/3 of the GBP 20 million we have already seen kind of in the first half, so it will ramp up in the second half.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [35]

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And with just on restructuring generally, I mean it's become sort of the norm of the exceptional, at what point is it an ambition that these charges don't occur at some point now?

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Roy M. Twite, IMI plc - CEO & Director [36]

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Yes. I man that really doesn't have to be an ambition, David. I think one of the virtues of IMI over a lot of the other valve companies when we were discussing this morning, right, that pulled it into losses and some of our big peers that you've all seen have ended up being sold off or making sort of 5% margins is that we will adapt IMI to the current market realities we will not see on our hands. We will make sure that we reshape IMI for growth continuously.

So what I see over the next few years, I think that we will be spending restructuring money. I also think that we can improve free cash flow at the same time because I think there is room to improve the margins through the cycle. Again, I can't be defy gravity with things like Industrial Automation, I'm not naive, but all of us, me and the three DMDs have an absolute ambition to improve margins and free cash flow through the cycle, David. So we will deploy that money both in restructuring to make sure we're fit for growth and fit for the future and obviously, in terms of acquisitions and new products as well.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [37]

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And just on the growth going forward, other engineers whey try to do the same program have talked about revenue investment and obviously, that impacting margins with more R&D. You don't seem to be suggesting that.

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Roy M. Twite, IMI plc - CEO & Director [38]

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No. I think that's right, David. I think we are redeploying our best people. So one of the great things Mark did it was he brought a team, an outside graduate program -- I'm a graduate program person, right? A few years ago now but -- for IMI, and it's fantastic what we've got over the last 3 or 4 years in terms of young talent and probably the best that I had last year was the pitch event in Critical. Because you've got a mixture of older experienced engineers, you got very diverse teams and you got some of these young talents, who has only been with IMI sort of 3 years, 4 years, 5 years. And that mixture in India or in China or in the U.S., in Europe really the pitch event, there's so much energy because once they -- these teams are talking to over 100 customers, over 100 customers. Some of these people haven't talked to a customer as a young graduate in their time with IMI. Between them, they found an industry problem and between them they're trying to create a solution, they have created a solution. And that energy, some of these people are just working 7 days a week, not because anybody's asking them to because that's how much energy they have for being innovative, being creative.

And so we're not going to go and hire a lot of new people, I think what will happen over time is that these people will be promoted because some of the pitch presentations, I thought, wow the future of IMI is safe because these people really understand the customer, they really understand how to create value for customer and how to put that in pound notes and they really understand the business models required to capture some of that value.

So for me David, no, we won't be going and hiring a load of new people. We'll be using our existing people -- the best of our existing people in those teams, trading them up and letting them go.

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Edward Maravanyika, Citigroup Inc, Research Division - VP [39]

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Edward Maravanyika from Citigroup, just two questions on the Petrochem, LNG and Oil & Gas sort of LNG segment. Can you just talk through what the order book looks like from geography from a pricing compared to different points in the cycle? And also just from a timing point of view, when you would see the project actually kicking off?

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Roy M. Twite, IMI plc - CEO & Director [40]

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Yes. So LNG is probably this biggest swing back to us you probably know that Ed, right? So in LNG we've got very strong pipeline, orders as I said, are doubling. Prize is very competitive, still in all of our new construction in Critical, still very competitive. The timing, so in LNG, it's typically 18 months, 2 years after the investment decision that we get the chance to win an order. 12 months after that, we ship the order. About 2 years after that, we start to get aftermarket, which is worth about on the same -- on the severe service valve I should say, is worth about 10% of the new construction value, the project value every year after that. Good margins. So it's a nice annuity we get from LNG. So that'll give you an idea.

Downstream is similar and maybe longer actually, in terms of the investment cycle. They are often the licenses, really very important to us because they are actually design the technology, and they can have a very long forward view of projects, Jackie. And it could be 7 years, couldn't it? We can see a project coming, then you'll receive an investment, it's a similar sort of cycle. In Petrochem our aftermarket is not good as it is in LNG to give you a rough idea. And then we sell other valves, which are nonsevere service, they are semi-severe, as Michael was saying earlier, and they have far less aftermarket with them. Yes, so this will be butterfly valves, pull valves, the best valves for us are those right in the severe service applications because they wear and create aftermarket.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [41]

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Roy, it's Matt Spurr from Exane BNP Paribas. I had a couple of questions. So the first on your strategy, wondering if you can go back further and compare it to the sweet spot strategy. How is it different? Because I'm hearing some of the things that are the same, attractive adjacencies, focus on pricing, perhaps less of a focus on subsegments or Industrial Automation, how is it different from sweet spot?

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Roy M. Twite, IMI plc - CEO & Director [42]

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Yes, interesting. So lots of good things in sweet spot because those of you who don't know, it really looked at the markets where we could win as you say Matt, which were attractive markets. It looked the differentiated technology that we had and it said okay, how the overlap between those two things is where we can maximize returns.

The issue as all of you know was that we didn't grow fast enough with sweet spot. So two things are completely different. One is the level of investment, so the GBP 70 million roughly of capital spend will stay at that level, right? Well, is in -- on the sweet spot, we were probably spending about half of that max, right? So the investment in the business is going to be maintained at current levels. The focus on competitiveness in the core business is the second major change using the lean tools. And then the third absolutely major change is the growth accelerator. So never before in my 30 years in IMI have we used teams to go and create new product that's genuinely differentiated, genuinely market-led, we very much used the typical industrial processes of product marketing, quality data, customer quality data to try and discern new products or we've used areas like competitive teardown, this is brand-new in terms of its growth potential.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [43]

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Okay. And then if I had another question, it would be on the, yes, Industrial Automation. How in practice conceptually do you walk away from some of the segments there? Because the way I understand it, a lot of it distribution-led, it's lot of standardized ISO products. How in practice you choose not to focus on a segment in Industrial Automation?

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Roy M. Twite, IMI plc - CEO & Director [44]

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Well, first thing you can do is obviously, you can invest more in the areas where you can win, which was effectively what we did in sweet spot. So we looked at food and beverage, we said there is a fantastic growth trend here because of variability in the packaging, we need to invest heavily in that segment.

What you can also do in terms of not focusing on a segment ultimately, is obviously look at disposal as we've done in Critical. I think in Critical, we've sold 5 companies now over the last 5 years or indeed, even as we did when you look at merchandising. So we can certainly -- and we're certainly not afraid of disposing of companies that we think we can own well and create real value with, Matt. We're certainly not afraid doing that.

So we can certainly look at those areas. There are some groups of customers, and I'm sure you know them from your analysis of Precision, that are quite bespoke and actually served through parts of the business that don't affect the ISO cylinder and the FRLs and those areas, and one of which is very attractive which we haven't broken out historically, but we're looking at breaking now, which is fluid control. And Massimo and I are very excited. Now we've got a company in Switzerland called FAS, we got a company in Germany called Buschjost which create huge differentiation in the way that they control fluids. And so there are some areas again of Precision that we can really focus on, really drive investment and growth and value from.

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Matthew Spurr, Exane BNP Paribas, Research Division - Research Analyst [45]

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I had one quick follow-up and on the Critical sales, you said 7% down in volume. I just checked that you said volume rather than organic growth. And then can you help a little bit with the phasing on that? Because you've got -- I think in the past, you've sometimes referred to order input as a guide and other times, you've referred to order book. Is it because just some of these projects are long dated when you're talking about Oil & Gas? I mean, your order input is flat, it's about 20% this year, good book-to-bill.

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Roy M. Twite, IMI plc - CEO & Director [46]

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Yes. So Matt, so Critical is complex. It's large, it's lumpy, and that's why me, Jackie, the team, we spend a long time analyzing it project-by-project to try and give the best guidance we can give. And right from the IMS in November last year, I have been saying Critical is going to be down this year, it was obvious from the first half orders last year. We said pretty clearly that it was going to be down as you said in line with the order book. This year, it's going to be about 7% down. We still think it's absolutely going to be about 7% down.

When we come to future guidance, we will pick Matt, the best comparative that matches with the mix of projects, the timing -- you can imagine a nuclear project can easily take 2 years from the point that you get an order to the point you get a dispatch. And aftermarket order on the other hand, can take a bit at least 6 weeks. So between all of that complexity, we will give the best guidance we can possibly give and that's why sometimes we choose order book, sometimes we choose order round that. We'll work it all out in detail and then give the best guidance we can possibly give to the market.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [47]

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Mark Davies Jones with Stifel. Two things, firstly just picking up on that review of Industrial Automation within Precision. Is there also a regional aspect to that? Because I know it's a very regional market in some of those segments. Are there some segments where it doesn't make sense for you to compete in one part of the world but it would make sense elsewhere?

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Roy M. Twite, IMI plc - CEO & Director [48]

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Yes. It's interesting, Mark. And again, we're looking at it in that way. I mean we really like, I know Massimo really likes, what we've done with Bimba in the U.S. because we got a pretty strong position in the U.S. relative to our competitors, whereas obviously in Europe, we haven't got such a strong position generally. Some markets are different, we're strong in the U.K. for instance.

But you are absolutely right. I mean, if you look at some our business today, it's still fairly geographical. So things like implant automotive, where we're servicing the big automotive customers, we're strong in some regions and not in others. And again, we're looking at how do we differentiate enough? Is that something that we could move across other regions? Or is it something that actually we're going to lose over the long term in? So absolutely we got a geographic angle on this. We had a session with the Board on Wednesday, and we're getting right -- as I said, it's very data-led, this is where we have been winning, this is where we think we can win, this is why meeting our profitable growth expectations.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [49]

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And just if I can come back to Hydronic, I get the point about acceleration growth by moving into adjacencies. But again, we've kind of been there before, and we tried that and it didn't work out quite as hoped in the previous diversifications and we've trenched back to the core markets again. So what's different this time?

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Roy M. Twite, IMI plc - CEO & Director [50]

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Yes, it's a good question. So what's different? I think, what we've done is largely spend our new product investment money on bringing out a better radiator valve, a better balancing valve, and obviously, an actuator. And so that's good because we've got very competitive -- as you know, we made very good money. And we need to protect that core banks. But what that hasn't done is give us the growth that we want to get from the newer areas, like potentially radiant heating. So there are much faster growing areas within that market that we don't currently serve. So through a mixture of acquisition and through a mixture of new products, we think we can move the business into those more attractive markets over the next few years. And in the meantime, improve the margins back to where historically they've been.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [51]

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Okay. So it's not a tradeoff between the margin and the credit in terms of...

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Roy M. Twite, IMI plc - CEO & Director [52]

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Not at all, not at all. I don't want to give that impression, thank you for clarifying that, Mark. It is not at all -- we -- as I said, we will be holding investments at the high levels that we've had over the last 5 years. And we do see opportunity. But what we're not going to do is bring through the product the same as the competition got if the competition is already strong in a particular market. What we're going to do is find areas where customers need better solutions, they've got some sort of problem, not just a customer but across an industry segment, and we're going to go after those areas to create strong differentiation, with the fantastic brands we've got. I mean the brand surveys we have done in Hydronic have been amazing. I've never seen brand surveys like it in terms of the customer stickiness. It's been fantastic and that really helps us think about where else we can apply that brand and pull through more product.

Great. Okay, well, thanks very much. Hopefully, you have got an idea on the differences from the last 5 years. Obviously, we're building on the foundations, but we're really focusing now on accelerating returns through the cycle. Thank you very much.

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Operator [53]

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Ladies and gentlemen, thank you for joining. You may now disconnect your lines.