IMI Regulatory News (IMI)

28 July 2023

Strong organic growth, margin improvement and cash delivery

Purpose-led strategy continuing to deliver growth

Full year guidance reconfirmed

Interim results, six months ended 30 June 2023

1 Excluding the effect of adjusting items as reported in the income statement. See Note 2 for definitions of alternative performance measures.

2 Adjusted operating cash flow, as described in Note 2 to the financial statements. Statutory measure is Cash generated from operations as shown on the cash flow statement.

3 After adjusting for acquisitions, disposals and exchange rates (see Note 3).

Continued strong performance

§ 12% sales growth, 17% adjusted profit before tax growth, 15% basic EPS growth

§ Adjusted operating margin 140bps higher than H1 2022

§ Statutory operating profit up 15%

§ Statutory profit after tax up 16%

§ Operating cash flow significantly higher

§ Interim dividend increased by 10%

§ Business structure aligning to key sectors

Roy Twite, Chief Executive, said:

"During the first half, we have made excellent progress with our purpose-led strategy, Breakthrough Engineering for a Better World. We are creating value for all our stakeholders by increasing customer intimacy, driving market-led innovation and reducing complexity. We continue to help our customers become safer, more sustainable and more productive. Our new business structure from July 2023 further aligns us to our key sectors and positions IMI to accelerate growth. In light of the success of our Better World strategy we have expanded our financial framework with through-cycle targets of 5% organic growth, a 20% adjusted operating margin and 90% cash conversion. In addition, as we grow the business through M&A, we expect return on invested capital to remain above 12%."

"Based on the strong first half result and current market conditions we expect 2023 full year adjusted EPS to be between 112p and 117p."

Enquiries

A live webcast of the analyst meeting taking place today at 08:00am (BST) will be available on the investor page of the Group's website: www.imiplc.com. The Group plans to release its next Interim Management Statement on 9 November 2023.

Strategic progress

Positioning IMI for accelerated growth

Today we announce the next steps of our purpose-led strategy, Breakthrough Engineering for a Better World. IMI is always evolving. The sectors in which we operate have increased and expanded and the way we help solve customer problems has strengthened. We are making changes to our structure to enhance further our customer focus.

To build on our growth opportunities, we are organising IMI into an Automation business and a Life Technology business. The aim is to accelerate Better World growth by getting us even closer to our customers through sector focused teams.

Effective immediately, Jackie Hu will lead the Automation business, which will leverage deep automation technology and applications expertise to improve productivity, safety and sustainability in the Process Automation and Industrial Automation sectors. This platform includes IMI Critical Engineering and IMI Precision Engineering's Industrial Automation business.

Beth Ferreira will lead the Life Technology business, which will focus on technologies that enhance and improve everyday life, particularly in the areas of health, sustainability and comfort across the Climate Control, Transport, Life Science and Fluid Control sectors. This platform includes IMI Hydronic Engineering and IMI Precision Engineering's Fluid OEM and Transportation businesses.

From July 2023, reporting is being aligned across the two businesses and five sectors and will be used in our 2023 preliminary results announcement in early 2024.

Our financial framework

Given the success of the Better World strategy launched in November 2019, we are expanding the financial framework for the Group. We continue to build towards our 20% through-cycle adjusted operating margin target. Today we add through-cycle targets of 5% organic growth and 90% cash conversion. In addition, as we grow the business through M&A, we expect return on invested capital to remain above 12%.

Sustainability: creating a Better World

Our purpose, Breakthrough Engineering for a Better World, continues to drive our actions and create real energy across our organisation. IMI's solutions support the safety, sustainability, and productivity of our customers' products and operations, and often directly contribute to the delivery of their carbon reduction targets. When considering investments, we ensure that the impact on IMI's ESG objectives is a prime consideration.

IMI sees a natural link between pursuing our ESG objectives with vigour and our wider ambitions for improved growth and profitability. Many of our best growth opportunities are supporting customers in developing solutions for a zero-carbon future. In particular, we are supporting development in many aspects of the Hydrogen value chain, including electrolysis, liquid storage, refuelling and heavy-duty trucks. Our hydrogen related orders in 2023 are expected to double from £7m in 2022.

We have also agreed our first Sustainability linked revolving credit facility for £50m in June 2023 and will use this as a template to convert our remaining lending facilities as they come up for renewal.

We have submitted our commitment letter to the Science Based Target Initiative and plan to submit our targets later this year for approval. We continue to reduce our CO2 emissions for Scope 1, Scope 2 and Scope 3, making meaningful progress toward our Net Zero targets. We continue to improve our metrics regarding water withdrawal and non-recyclable hazardous waste.

Our Inclusion and Diversity activities are helping to build a more dynamic and innovative organisation. The female representation on the Board is currently 44% and the Executive Committee is 43%. Our employee engagement remains high, with 77% of all employees seeing IMI as a great place to work (2022: 80%).

Ensuring all our employees feel safe at work is central to our strategy and culture. Total recordable incidents in the first half were 17 (2022: 15), we have a continued focus on identifying and reducing workplace hazards, and remain committed to the ambition of an accident-free workplace.

The Group's commitment to a Better World is evident in our many external ESG credentials, including a MSCI AA rating, and our membership of the FTSE4Good Index. We are also proud to have been awarded the LSE's Green Economy Mark, as our products and services contribute to a number of environmental objectives such as climate change mitigation, waste and pollution reduction, and the circular economy.

More information about our ESG credentials and initiatives, including our policies and practices, can be found on our website: www.imiplc.com.

Results overview

Strong organic growth, margin improvement and cash delivery

IMI has delivered a strong first half performance, with Group revenue growth of 12% compared to the same period last year and 7% higher organically. First half adjusted operating margin has increased by 140bps when compared to the prior period.

1 Excluding the effect of adjusting items as reported in the income statement. See Note 2 for definitions of alternative performance measures.

2 After adjusting for exchange rates, acquisitions and disposals (see Note 3).

This strong performance reflects continued focus on our unifying purpose-led strategy, Breakthrough Engineering for a Better World. We are creating value by increasing customer intimacy, driving market-led innovation and reducing complexity. These actions have allowed us to generate strong growth in the order book and revenue as well as improving margins.

Sector performance

1 After adjusting for exchange rates, acquisitions and disposals (see Note 3).

1 After adjusting for exchange rates, acquisitions and disposals (see Note 3).

Process Automation (IMI Critical Engineering) had an excellent first half, with strong order intake and continued organic growth. Orders were up 30% organically, with a 26% increase in Aftermarket. We have seen particular strength in LNG, Marine and downstream Oil & Gas, with new products continuing to make a major contribution to growth.

Industrial Automation (IMI Precision Industrial Automation) delivered a good performance despite uncertain markets. We see continued demand for solutions that automate processes in a competitive labour market.

Climate Control (IMI Hydronic Engineering) saw strong demand for our energy saving products. The integration of Heatmiser, acquired in December 2022, is progressing well and we see a significant opportunity to scale Heatmiser's unique product portfolio across our core European markets.

Life Science & Fluid Control (IMI Precision Fluid OEM) saw modest levels of customer destocking in the first half, although underlying demand for our innovative product portfolio remains solid.

Transport (IMI Precision Transportation) saw growth across all regions in the first half as supply chains began to normalise. We have benefited from a particularly strong recovery in China following the easing of COVID-19 restrictions.

Dividend

The Board is recommending a 2023 interim dividend of 9.1p per share (2022: 8.3p per share). Payment will be made on 15 September 2023 to shareholders on the register at the close of business on 11 August 2023.

Outlook

Based on the strong first half results and current market conditions our guidance for 2023 full year adjusted EPS is unchanged at 112p to 117p.

This reflects c.3% business outperformance since our last update, offset by foreign exchange, which is now expected to lead to a full year headwind of 1%. Divisional guidance remains unchanged.

Divisional results overview

The following review relates to our continuing businesses' performance for the six months ended 30 June 2023 when compared to the same period in 2022. References to organic growth are on a constant currency basis and exclude disposals and acquisitions, see Note 3 for a reconciliation of these measures.

1 Excluding the effect of adjusting items as reported in the income statement. See Note 2 for definitions of alternative performance measures.

2 After adjusting for exchange rates, acquisitions and disposals (see Note 3).

IMI Precision Engineering

IMI Precision Engineering performed well in the first half. Organic revenue grew by 2%, with growth in Industrial Automation and Transportation more than offsetting lower revenue due to customer destocking in Life Sciences. Adjusted revenue grew by 7%, with recent acquisitions making a positive contribution to divisional performance. 

Adjusted operating margin in the division improved in the period by 140bps to 19.6%. The division continues to advance complexity reduction initiatives which will support further margin expansion.

Statutory operating profit increased by 4%, as increased restructuring spend partly offset the strong trading result. 

IMI Critical Engineering

IMI Critical Engineering continues to advance its strategy and is actively deploying Growth Hub where its expertise can support sustainable future growth. Organic revenue was 15% higher than the prior period, and 17% higher on an adjusted basis.

Organic adjusted operating profit was 21% higher than the first half of 2022, another strong result reflecting the division's strategy to maximise aftermarket opportunities and optimise its operating footprint for the future. Adjusted operating margin for the first half was 16.5%, 90bps higher than the prior period.

Statutory operating profit increased by 21%, reflecting the excellent first half performance.

IMI Hydronic Engineering

With its strong brands and product positioning, combined with the global imperative to reduce energy consumption in buildings, IMI Hydronic Engineering is positioned to deliver sustainable, profitable growth.

Organic revenue was 5% higher than the prior period and 15% higher on an adjusted basis. The integration of Heatmiser, acquired in December 2022, is progressing well as we look to accelerate our growth in smart buildings.

Adjusted operating profit increased by 4% on an organic basis and 24% on an adjusted basis. The adjusted operating margin improved by 150bps in the period to 21.8%, reflecting the quality of the business.

Statutory operating profit increased by 11%, with the strong trading result partly offset by higher acquired intangible amortisation following the Heatmiser acquisition.

Financial review

Strong first half performance

Revenue of £1,084m was up 12% (2022: £972m). Organic revenue increased 7% when compared with the same period in the previous year, after adjusting for acquisitions, disposals and exchange rate movements. Adjusted operating profit was £193m, a 21% increase on the prior period (2022: £160m). On an organic basis, adjusted operating profit increased by 13%. Group adjusted operating margin increased by 140bps to 17.8% (2022: 16.4%). Statutory operating profit was up 15% at £149m (2022: £129m).

Adjusted net interest costs on borrowings were £12.0m (2022: £6.6m) and were covered 20 times by adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £239m (2022: £202m). The IAS19 pension net financial expense was £0.7m (2022: £0.8m income). The total adjusted net financial expense was £12.7m (2022: £5.8m), reflective of the increase in both borrowing and interest rates since last year. Profit before tax and adjusting items was £180m, an increase of 17% (2022: £154m).

The adjusted Group effective tax rate on profit for the first half increased to 22.3% (2022: 21.0%), reflecting the increase in the UK statutory rate of corporation tax from 19% to 25% with effect from 1 April 2023.

Statutory profit before tax was £139m (2022: £121m). The total statutory profit for the period after taxation was £109m (2022: £95m).

Adjusting items

Restructuring costs of £24m were incurred in the first half (2022: £8m). A detailed breakdown of these costs by division, alongside expected benefits is provided below. Further details on 2022 projects are included in Note 2.

The impact of amortisation of acquired intangibles and other acquisition costs was £18m (2022: £15m), largely reflecting the acquisitions of Bahr and Heatmiser, which completed during 2022. The reversal of net economic hedge contract gains and losses resulted in a £1m charge (2022: £1m charge).

The tax effect of the above adjusting items was a credit of £11m (2022: £6m).

Complexity reduction continues to deliver benefits

Along with investments into our future growth, IMI continues to identify and execute on opportunities to drive more efficient operations. The following table provides a summary of progress on our restructuring programmes:

*Future looking forecast information.

All three divisions advanced their significant multi-year restructuring programmes in the first half, recognising a total charge of £24m.

The restructuring programme contributed £8m of benefits in the first half, and is on track to deliver £20m for the full year.

We continue to expect that significant projects will largely complete by 2024, although the Group will always seek and execute on opportunities that improve its competitive position.

Earnings per share

The average number of shares in issue during the period was 259m (2022: 258m), resulting in adjusted basic earnings per share of 54.0p (2022: 47.1p). Statutory basic earnings per share was 42.2p (2022: 36.6p) and statutory diluted earnings per share was 42.1p (2022: 36.5p).

Foreign exchange

The impacts of translation on the reported growth of first half revenue and adjusted operating profit was a favourable increase of £35m and increase of £7m, respectively. The most significant foreign currencies for the Group remain the Euro and the US Dollar and the relevant rates of exchange for the period and at the period end are shown in Note 13 to this report.

If the exchange rates on 14 July (US$1.31 and €1.17) remained constant for the remainder of the year, it would negatively impact both revenue and adjusted operating profit by 1% in the year when compared to 2022.

Cash flow

Cash generated from operations increased to £174m (2022: £111m). Adjusted operating cash flow (see definition in Note 2) increased to £145m (2022: £79m), largely reflecting the strong trading result and reduced working capital investments. Trade and other receivables increased by £42m, inventories increased by £52m and trade and other payables increased by £47m. Capital expenditure amounted to £36m (2022: £40m) and was 1.2 times (2022: 1.4 times) the adjusted depreciation and amortisation charge for the period of £31m (2022: £28m), which excludes depreciation from the IFRS 16 right of use assets of £15m (2022: £14m).

The other major cash outflows in the period were dividends to shareholders of £45m, a £24m outflow for adjusting items primarily related to the Group's restructuring programme, and £43m of tax. The total cash inflow for the period, excluding the impact of foreign exchange and movement of lease liabilities, was £28m, compared with an outflow of £122m in the first half of the previous year.

Definitions of adjusted performance measures are included in Note 2 and a reconciliation of adjusted measures to statutory measures is included in Note 11.

Balance sheet

The Group maintains an appropriate mixture of cash and short, medium and long-term debt arrangements which provide sufficient headroom for both ongoing activities and acquisitions. Total committed bank loan facilities available to the Group at 30 June 2023 were £300m (December 2022: £300m), of which £106m (December 2022: £100m) was drawn.

The ratio of net debt to the last twelve months' EBITDA (before adjusting items) is a funding covenant that is currently limited to 3.0x and was 1.6x at the end of June 2023 (December 2022: 1.8x).

Trade and other receivables have increased by £24m (5%) to £508m at 30 June 2023 (December 2022: £484m). Inventories have increased by £33m (8%) to £451m at 30 June 2023 (December 2022: £418m), with investments to support the order book growth in Process Automation offsetting the strategic reduction of inventory in other sectors. Trade and other payables have increased by £24m (5%) to £463m at 30 June 2023 (December 2022: £439m).

Goodwill decreased to £681m (December 2022 restated: £704m) due to movements in exchange rates.

The net deficit for defined benefit obligations at 30 June 2023 was £40m (December 2022: £19m deficit). The UK surplus was £6m (December 2022: £28m surplus) with the liabilities now fully bought-in and no future funding requirements expected. The deficit in the overseas funds as at 30 June 2023 was £46m (31 December 2022: £47m deficit).

Shareholders' equity at the end of June was £920m, an increase of £14m since the end of last year. This is largely attributable to the profit for the period of £109m and the after-tax impact of share-based payments of £5m.These gains were offset by an after-tax actuarial charge on the defined benefit pension plans of £17m, unfavourable exchange differences and related tax of £38m and dividends paid of £45m.

Other regulatory information

Going concern

After making enquiries, the directors have a reasonable expectation that IMI plc ('the Company') and the Group have adequate resources to continue in operational existence for the foreseeable future and for a period of at least twelve months following the approval of the Interim Financial Report. Accordingly, they continue to adopt the going concern basis. See Note 1 for further information on the directors' considerations in reaching this conclusion.

The directors have considered the current macroeconomic conditions on the Group's financial results and financial position. The directors have assessed the viability of the Group and reviewed detailed cash flow forecast scenarios, including comparing a reverse stress test to those detailed forecasts. The directors have a reasonable expectation that the financial headroom will not be exhausted during the twelve months following the date of approval of the Interim Financial Report.

Principal risks and uncertainties

The Group has a risk management structure and internal controls in place which are designed to identify, manage and mitigate business risk. IMI faces a number of risks and uncertainties which could have a material impact on the Group's long-term performance.

On pages 88 to 93 of its 2022 Annual Report (a copy of which is available on IMI's website: www.imiplc.com), the Company sets out what the directors regarded as being the principal risks and uncertainties facing the Group and which could have a material impact on the Group's long-term performance. These risks include global economic uncertainty and political instability, competitive markets, failure to manage the supply chain, talent retention and attraction, cyber security risks, new product development, natural disasters, major transformational project delivery risk, regulatory breach, product quality issues and acquisition risk. Having considered the current environment, the directors have considered that these risks remain valid and have the potential to impact the Group during the second half of 2023. The directors have identified artificial intelligence as an additional principal risk during the first half given the fast-developing technology in this area. The impact of the macro-economic and end-market environments in which the Group's businesses operate have been considered in making the comments in the divisional review and outlook sections of this Interim Financial Report.

Safe harbour statement

This Interim Financial Report contains forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this announcement and the Company undertakes no obligation to update these forward-looking statements. All written or oral forward-looking statements attributable to IMI plc are qualified by this caution. Nothing in this Interim Financial Report should be construed as a profit forecast.

Responsibility statement of the directors in respect of the Interim Financial Report

We confirm that to the best of our knowledge:

§ the condensed set of interim financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the UK

§ the Interim Financial Report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and

§ there were no changes in the related party transactions described in the 2022 Annual Report thatmaterially affected the Group's results or financial position during the six months ended 30 June 2023.

The directors of IMI plc are listed on the IMI plc website (www.imiplc.com).

Approved by the Board of IMI plc and signed on its behalf by:

Roy Twite Daniel Shook Chief Executive Finance Director27 July 2023 27 July 2023

Notes to editors

IMI plc is a specialist engineering company operating in fluid and motion control markets. We combine our deep engineering knowledge with strong applications expertise to develop solutions for the most acute industry problems. We help our customers become safer, more sustainable and more productive. IMI employs around 10,000 people, has manufacturing facilities in 19 countries and operates a global service network. The Company is listed on the London Stock Exchange and is a constituent of the FTSE4Good Index. Further information is available at www.imiplc.com.

IMI plc is registered in England No. 714275. Its legal entity identifier ('LEI') number is 2138002W9Q21PF.

INDEPENDENT REVIEW REPORT TO IMI PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the comprehensive income, condensed consolidated interim balance sheet, condensed consolidated interim statement of changes in equity, condensed consolidated interim statement of cash flows and related Notes 1 to 15.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in Note 1, the annual financial statements of the Group will be prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE (UK) 2410. However future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London

27 July 2023