11 November 2010
IMI plc ("IMI" or "the Group")
Interim Management Statement
IMI, the international engineering group, issues the following Interim Management Statement, which covers the period from 1 July to 10 November 2010.
Current trading and Outlook
The positive momentum seen in the first half has continued into the second half with good progress across most areas of the Group. Overall revenues in the ten months to the end of October are now up 6% on a constant currency basis. Volumes within Fluid Power, in particular, have continued to strengthen, more than offsetting the continuing challenging conditions within the fossil power sector of our Severe Service business. This strong revenue performance, together with further positive margin improvement, leads us to expect earnings per share before exceptional items for the full year to be at the middle to upper end of latest analyst expectations, which now range between 62p and 66p.
Whilst the macro-economic environment continues to be uncertain, IMI is well placed to capitalise on the long term favourable trends in clean fuel, energy efficiency, environmental control and healthcare expenditure. Accordingly we are increasing our investment in sales and new product development resource focused in these areas, with a particular emphasis on the emerging markets.
Our Severe Service business, which operates in later cycle markets, has seen total order intake up 9% in the ten months to the end of October over the same period last year. The strong recovery in our Oil and Gas markets has continued, with year to date order intake up around 80% over the prior period. Activity levels in the Aftermarket and Nuclear businesses also remain healthy. The Fossil Power sector, however, remains very challenging with the improvement in enquiry levels noted earlier in the year only slowly converting to a recovery in order intake. As a result of lower than expected Fossil Power shipments, we expect 2010 full year revenues for Severe Service to be down around 10-15% on last year, with margins, as a consequence, slightly lower. However, the increased order intake year to date, together with the ongoing strength in the Nuclear and Aftermarket businesses, should support a return to growth next year.
We have continued to see good growth in our Fluid Power business, with revenues in the ten months to the end of October up 33% on 2009 on an organic basis. Strong momentum has been maintained in our key global sectors - Commercial Vehicles, Life Sciences, Rail, Energy and Food & Beverage. We also remain focused on margin improvement to maximise the profit drop through from these higher volumes. Good progress continues to be made with the transfer of production lines to our expanded lower cost manufacturing facilities in China, Czech Republic and Mexico. Fluid Power margins are expected to show further progress on the levels achieved in the first half of the year.
The Indoor Climate business is continuing to perform well through the important heating season of September to November. Following a slower start to the year, activity levels have continued to strengthen, with revenues on a constant currency basis over the ten months to the end of October now slightly ahead of last year. We continue to benefit from the cost saving initiatives implemented over the last two years and second half margins are now expected to show progress over the record levels achieved in the second half of last year.
Longer term we continue to believe that the prospects for this business remain very attractive as the demand for more energy efficient commercial and residential building solutions, driven by energy costs and environmental legislation, continues to increase both in the new build and, importantly, in the refurbishment markets.
Volumes in Beverage Dispense have continued to strengthen in the second half with revenues to the end of October up 5% on an organic basis over last year. This good performance continues to be driven by positive market trends in North America and Asia offsetting more challenging market conditions in Europe. In addition, 3Wire our North American parts business, continues to deliver attractive growth.
The business remains focused on margin improvement through a combination of growth in new product sales, further cost saving initiatives and, as previously detailed, by exiting a number of lower margin products. Whilst margins in Beverage are seasonally stronger in the first half we expect second half margins to be better than in the second half of last year.
As expected, Merchandising has seen stronger shipment growth in the second half with revenues on an organic basis in the ten months to the end of October now slightly ahead, having been down 12% in the first six months. This performance reflects some good project wins, notably in the automotive sector.
Operating margins have continued to improve in the second half as the business focuses on higher margin projects and delivers operational efficiencies. We now expect Merchandising to report improved margins in the second half compared to the same period of last year.
Financial position and restructuring
The Group continues to be highly cash generative, driven by further improvements in inventory turns despite some dual running of manufacturing facilities as we transition to lower cost facilities. As a consequence, we anticipate cash conversion for the second half to be in excess of 100% leading to a significant reduction in net debt before the impact of the Zimmermann & Jansen acquisition which is expected to complete around the year end.
As highlighted above, our moves to new lower cost manufacturing facilities, most notably within the Severe Service and Fluid Power divisions, continue to progress well. During the second half we have accelerated this process and now anticipate restructuring costs for the year to be nearer £15m, up from the £10m indicated at the interim results.
On 2 September 2010, following the conclusion of an arbitration process, £7.4m was received from Polypipe in settlement of the earn out provisions attached to the sale of that business in September 2005. This will be reported within discontinued operations.
Severe Service acquisition
On 25 October 2010 IMI announced that it had agreed to acquire Zimmermann & Jansen ("Z&J"), a leading engineering business specialising in severe service valves and related flow control products, for an enterprise value of €135m. The acquisition of Z&J is highly complementary, both in market terms, extending IMI's severe service interests into downstream Oil and Gas (Refining and Petrochemical) and into Iron and Steel; and in technology terms, with Z&J's highly acclaimed isolation valve technology a natural fit alongside the Truflo technology acquired in 2006. The use of IMI's global sales and aftermarket infrastructure is expected to improve Z&J's geographic penetration, in much the same way it has done for the Truflo business. The acquisition is subject to regulatory clearances which are expected to be received by 31 December 2010.
IMI will announce its preliminary results for the year ending 31 December 2010 on 3 March 2011.
Will Shaw IMI Tel: +44 (0)121 717 3712
Rollo Head / Clare Hunt Finsbury Tel: +44 (0)20 7251 3801