IMI's (IMIAF) CEO Mark Selway on Q4 2016 Results - Earnings Call Transcript

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IMI plc (OTCPK:IMIAF) Q4 2016 Results Earnings Conference Call February 24, 2017 3:30 AM ET

Executives

Lord Smith - Kelvin, Chairman

Mark Selway - CEO

Dan Shook - Finance Director

Massimo Grassi - Divisional MD, Precision Engineering

Roy Twite - Divisional MD, Critical Engineering

Pete Spencer - Divisional MD, Hydronic Engineering

Analysts

Andrew Douglas - Jefferies

Michael Blogg - Investec

Jonathan Hurn - Deutsche Bank

Max Yates - Credit Suisse

Alex Virgo - BofA Merrill Lynch

Glen Liddy - JPMorgan

Stephen Swanton - Redburn Partners

Alasdair Leslie - Societe Generale

David Larkam - Numis

Mark Davies Jones - Stifel Nicolaus & Company, Inc.

Jonathan Mounsey - Exane BNP Paribas

Lord Smith

It gets less exciting from here on okay. I'm really into high tech of course.

Well, good morning, ladies and gentlemen. I am pleased to be here to present IMI's results for 2016 and to update you in the progress we're making and the strategies to accelerate the Group's long term growth.

So, in terms of today's agenda, I am going to present the highlights. Then Dan will follow with details of our financials. Then Mark will take you through our operational performance and our strategic progress before presenting the outlet for the remainder of the year.

So first, despite difficult market conditions, we continue to work to get the business fit for growth including investing in a number of areas, which Mark will cover in detail in the operational review.

And secondly, our plan to significantly improve the business remains our absolute focus and while the investments and current economic conditions continue to have an impact in these early years, we remain on track to deliver accelerated benefits in the later years of the plan.

So, as you can see from this slide, as expected on a like-for-like basis and despite difficult market conditions, the Group delivered results in line with expectations in 2016. So, on a reported basis, revenue of GBP1.65 billion was 6% higher than 2015.

Of course, that benefited from GBP179 million of exchange movements and a negative of GBP7 million related to acquisitions and disposals, but after adjusting for these impacts, revenue on an organic basis was 5% lower than the 2015. On a reported basis, segmental operating profit of GBP228 million was 5% lower and included GBP32 million of currency benefits and GBP1 million relating to acquisitions and disposals.

After adjusting for these impacts, segmental operating profit on an organic basis was 17% lower than the comparable period in 2015. Operating cash flow of GBP246 million was a highlight of the year and was 6% higher than the 2015. These results included the benefits of improved inventory and Precision critical and lower debtors in a Precision.

Net debt GBP283 million compared to GBP237 million in 2015 and included a currency hedge of GBP97 million due to the weakness of Sterling. So, reports earnings per share were 59.8p. On the back of these results reflecting the confidence that we have in the Group's future, the board is to clear the 1% increase in the final dividend of GBP 24.7 representing a full-year dividend of GBP38.7.

I'm now going to hand over to Dan who will take you through the financial details.

Dan Shook

Good morning, everyone. Thank you Lord Smith. Very pleased to be able to take you through the full-year results today.

As in the past, we've looked to give you our results on both a reported and organic constant currency basis. On revenue as Lord Smith mentioned we had a positive exchange rate impact of GBP179 million or 11% driven primarily by the stronger euro and U.S. dollar. The impact of disposal activity is shown on the slide most notably the sale of IMI Scott within our critical division in late 2015.

On an organic basis revenue decreased by 5% making reported revenue up by six. Reported segmental operating profit was GBP227.7 million compared with GBP239.4 million in 2015. On an organic constant currency basis, operating profit was down 17% with favorable FX reducing the decline to 5%.

The profit margin for the full year was 13.8% versus 15.4% in the prior year. Corporate costs were GBP24.5 million in the year and like last year reflect lower incentive charges. Our underlying costs remain at roughly GBP28 million.

If you look at the income statement in more detail and starting with our segmental operating profit of 227.7 million, we incurred GBP3.5 million of smaller restructuring costs in the year which are not treated as exceptional. The net interest expense of GBP17.3 million was lower by GBP1 million following the repayment of the high-interest loan note in the year.

We again recorded a small pension finance income reflecting the surplus within the U.K. scheme throughout 2016. Overall our profit before tax and exceptionals was GBP208 million.

Our IAS 39 adjustment was GBP1.2 million largely related to the reversal of hedge gains realized in the underlying results. We have recognized GBP18.8 million in exceptional restructuring costs mostly for activities in critical which include the transfer of our manufacturing activity at TH Jansen into Z&J in Germany and the transfer of manufacturing activity from Sweden into our lower-cost Czech Republic facility.

For 2017 we would expect our restructuring charge to be around GBP35 million as we further adjust our cost base and asset footprint in response to ongoing market weakness.

We also achieved an exceptional gain on pensions of GBP2.8 million and I will share on a later slide all the excellent work the team has done to further derisk our position. Acquired intangible amortization decreased GBP20.5 million following Bopp & Reuther order book amortization in 2015.

Statutory profit before tax was GBP165.3 million up 2% from the prior year. Tax of GBP32.1 million represents at a pre-exceptional level an effective tax rate of 21%, a rate we would expect to continue for the year ahead.

Moving to operating cash flow, our overall working capital movement of GBP30 million was favorable compared with last year by GBP12 million. Inventories reduced by GBP18 million as our lean initiatives continue to enable a systematic delivery of cash from our balance sheet. Debtors reduced by GBP7 million reflecting lower sales in our continued emphasis on collections payables increased by GBP5 million due to proactive supplier management across each of the divisions.

Capital expenditure at GBP71 million was flat versus the prior year reflecting our continuing investment in operational excellence, new product development and IT infrastructure. CapEx to depreciation and amortization was 1.5 times compared to 1.9 times in 2015 and reflects the growth in depreciation and amortization as we complete key strategic projects.

After some smaller provisioning movements and cash from property sales, we get to a pre-exceptional operating cash flow of GBP246 million, an increase of GBP14 million from the previous year, another excellent result underpinned by the efficiency gains within working capital.

So, continuing from pre-exceptional operating cash flow, we had GBP25 million of exceptional cash outflows largely reflecting our restructuring activities. Interest and derivatives shows an outflow of GBP61 million, which includes a net GBP17 million in payments on debt, plus an additional GBP44 million of cash settlements on our financial hedges.

These largely relate to the balance sheet hedges we maintain to hedge our euro and dollar assets. Tax paid was GBP32 million, a GBP4 million reduction from the prior year. We again had a small pension contribution to support our foreign schemes, our normal dividend payments and a net GBP7 million outflow for employee trust share purchases. This all led to a net GBP9 million inflow, which after an unfavorable GBP55 million FX revaluation on our dollar and euro debt, provides a net debt balance of GBP283 million.

Excluding the GBP97 million of adverse currency effects, the Group delivered GBP51 million of free cash flow in 2016, which again highlights IMI's ability to generate good cash flow even when markets are tough.

So, moving to the key balance sheet metrics, you will see that we continue to maintain a very strong balance sheet to support our growth plans. Gearing was up slightly at 52% and net debt to EBITDA marginally increased from last year to 1.0 times. As expected, the ratio dropped from 1.3 times at the half year.

Now looking at our pension position, IMI's proactive risk management continues to protect us from the adverse conditions impacting many corporates today. The liability increase in the year was largely offset by growth in our matched asset portfolio.

In the second half of the year, we executed a further transaction to de-risk our U.K. schemes through fully matched insurance contracts. With a large position now fully matched, we began working with the trustees to transfer both the risk and administration of liabilities to our insurance partners.

As a result, roughly GBP430 million of the U.K. pension liabilities representing over 5,000 scheme members were 43% of our population were transferred to three insurance companies in January. IMI will now de-recognize this amount from its asset and liability position going forward. We will continue to work with our scheme trustees around the company to manage the group's overall exposure.

And with FX, as previously mentioned, the weekend Sterling against our main operating currencies, resulted in a significant tailwind of 11% and 13% for revenue and operating profit respectively. If we assume FX rates in the beginning of February continued for the remainder of the year, we would expect the impact for 2017 to be positive by roughly 6% to 7%. Like in the past already a ready reckoner is provided to give you the impact for movements in both the dollar and the euro.

And with that, let me hand over to Mark to take you through the divisional reviews and strategy update.

Mark Selway

Thanks Dan and good morning, ladies and gentlemen. I'll now take you through the operational performance for each of our divisions and outline the progress being made to harness the Group's potential.

This slide is from our 2014 presentation where I provided a simple diagram of the timeline of events from which you can gauge our performance over the five years of the plan. In 2014, we completed our initial assessments, we benchmarked our performance and put in place those organizational plans to accelerate growth and double our profits.

And for the past two years, we increased our investments in product and capital for growth and the improvements have been massive from successful IT roll outs, standard quality systems and world-class new products, which now underpin the potential in all three of our divisions.

In 2016, we said that we expected accelerated growth to be evident in our results and the benefits of LEAN should be showing through in our working capital. Clearly the market dynamics have changed dramatically since the outline of those objectives in 2016. However, in the main all three of our divisions of keeping price and to a large extent, outrunning the majority of their peers.

The cash result for 2016 was very strong and that directly relates to the benefits of LEAN and in particular you'll notice from the results reduced inventory was a feature in both Precision and also in Critical EMEA.

In 2017 our ambition is for growth to outstrip all of our peers and for our acquisitions to be fully integrated and delivering synergies. I remain absolutely committed to that objective and Roy's recent actions to maybe Swiss and his Canadian nuclear businesses into Bopp & Reuther are delivering the synergy benefits irrespective of the market outlook.

We also said that our benchmark performance will be moving towards world class and you know from our divisional presentations we're making excellent progress in that regard. We then said in 2018 that will be firing on alternatives, with all divisions operating in attractive and high-growth markets.

And in 2019 our ambition was to double our operating profits and to be in a position of both world-class performance in each of our divisions. While I remain absolutely confident that the performance to world class standards remains deliverable, our profit goal will need to rely on more favorable markets and will almost certainly move beyond the initial period of this plan.

I’ll now take you through our operational performance and the strategic progress on a division by division basis and I'll start with critical. You'll be aware that this division is involved in the design and manufacture of highly engineered valves, actuators and controls capable of operating at the streams of temperature and pressure for the most demanding applications.

Order input at GBP614 million was 11% lower on an organic basis when new construction oil and gas down 13%, fossil power was down 23%, petrochemical was up 2%, and nuclear increased substantially from the retail in 2015.

Oil and gas orders of GBP135 million was 13% lower than 2015. With a 25% reduction in the first half, importantly offset by flat performance in the second half of the year. As previously flagged, LNG was 60% lower year-over-year following the peak of our project activity in 2015. Midstream grew substantially and reflected a GBP23 million order in Kazakhstan while HIPPS benefited from a GBP15 million order in the last quarter of the year.

In the aftermarket full-year order input of GBP299 million was 6% below the prior year, importantly with a return to 2015 levels in the second half of the year. At the aftermarket sector level there are a number of significant movements. LNG was 3% lower at GBP14 million and that reflected the delay in newly installed kit coming onstream.

Aftermarket power was down GBP19 million with lower levels of spend particularly in North America. And aftermarket in nuclear increased 36% to GBP44 million due to oneself Korean order in the final quarter of the year.

In terms of revenue, after adjusting for GBP77 million of exchange benefit and GBP6 million from prior year disposals, the revenue line at GBP651 million was 7% lower on an organic basis and 3% higher on a reported basis. New construction sales was 7% lower at GBP356 million, an 18% reduction in oil and gas partially offset by 13% increase in fossil power.

Aftermarket sales of GBP295 million were also 7% lower with oil and gas up 2%, reflecting solid progress in downstream and also in LNG, offsetting continued softness in the upstream activities. Power aftermarket sales of GBP132 million were 15% lower with parts down 13% and upgrades lower by 25%. Now nuclear was up 14% while petrochemical was 10% lower and that was mainly due to the disposal of our Italian service business.

Operating profit of GBP82 million was 24% below 2015 due to lower volumes and increased investments and market-driven delays partially offset by GBP14 million of favorable currency. And now lower operating profit resulted in margins reducing to 12.6% from 14.8% last year.

I'll now provide you with some detail on our 2017 order book, so that you can get a feel for the process that we've used in developing our plans and the outlook for the balance of 2017. On a like-for-like basis, the critical order book of GBP496 million was 8% below GBP527 million we had at the point last year.

Importantly, margins in the order book are almost identical to last year and we've got less book to ship required this year when we compare to our actual achievements in 2016.

Turning now to the strategic elements of critical engineering's performance, you'll recall from our market assessment that this division plays in three principal sectors; power generation, oil and gas, and petrochemical and our plan is all about focus and growth, both organically and supplemented with value enhancing acquisitions.

Now I don't need to tell you that conditions have changed dramatically since we first presented our strategy back in 2014, and as a result, our near-term growth objective has been paired back significantly.

Also in 2016, we experienced lower activity in fossil power and outages in North America reduced by almost 6%. So, in my time, I've seen the us ups and downs of the capital equipment markets and while the 2014 expectation of 6% to 8% growth seems unrealistic today, the latter use of our plan could well be quite different, but for now, we are operating in today's reality.

We continue to invest in our infrastructure and our service organizations with a view to increasing our exposure to those five growth markets and in 2015, we invested in a world-class manufacturing operation in Korea and last year, we completed the consolidation of three Chinese factories into a single world-class just outside of Shanghai.

These actions together with the significant investments we've made into Z&J in Germany, now provide the geographic footprint we need to underpin our success into the future and having identified the need for an ERP solution, in 2015 the critical team rolled out the new IFS system into the Czech Republic and also into Austria and this was extended with on time and on budget launches in Korea and in Sweden and Japan and India in 2016 with further sites being planned for this year.

Also in 2016, Roy and the critical team implemented a value engineering process and that helped to secure GBP18 million of new orders, which otherwise would have been lost in what is a difficult competitive environment. Now not only did this new work deliver broadly equivalent margins to our historic norms, but it also resulted in significant cost reductions to our customers.

Moving on to our manufacturing improvements, I promised to keep you updated on our progress with LEAN and hear are the results for critical engineering, which came in at an average score of 62% a huge improvement since the very first score of 24%.

You'll notice that our new Korean site progressed to the top of our lead table with 76% against last year's 66%. Importantly, they also achieved 99% on-time delivery and at the same time, they improved their turns.

As you'll be aware the deteriorating economic environment has resulted in the need for significant reorganization over the past two years. So, in addition to our previous disposals of Eley and IMI Scott and Z&J in South Africa, last year we disposed of a lossmaking service business in Italy and while these businesses were immaterial in revenue terms, they did represent non-core and higher risk assets, which were a distraction to management.

And in light of the significantly reduced nuclear activity post-Fukushima, we successfully executed the closure of IMI components and the transfer of our manufacturing operations in both Switzerland and Canada to Bopp & Reuther.

In addition, the critical team closed and transferred the operations of TH Jansen and both amended to Z&J in Germany. I'm placed to say these cost reduction initiatives were executed on time and on budget and delivered GBP12 million of cost benefits in the year.

And finally, in 2017, we're in the process of taking a number of other actions to reduce our European cost base. With an expected one-off costs of GBP16 million this year and an incremental benefit of around GBP16 million.

So when you put it all together despite the difficult economic backlog, the critical team delivered well against their strategic initiatives in 2016. The value engineering activities helped us to skew GBP18 million of new orders while managing margins and reducing the cost to customers. The rationalization program was delivered on time and on budget with GBP12 million profit benefit in the year and more to come again in 2017.

The on-time and on budget delivery of the divisions new IFS ERP system into additional four sites in the year, an increase in the division's average LEAN score to 62% and an 8% reduction in inventory in the year. And finally the consolidation of three smaller size into a new world-class facility just outside of Shanghai.

In terms of critical engineering's outlook based on the current order book we're expecting first half revenues to reflect a similar percentage reduction to the first half of 2016 and with margins broadly similar to the first half of last year and results of the full year are expected to include a second half bias which reflect the timing of restructuring benefits and normal trading seasonality.

Looking now to Precision Engineering and as you know that includes the Norgren businesses and a range of specialist valve and flow control technologies for applications where precision and speed and reliability are essential to the processes in which they're involved. Full-year revenue of GBP708 million was 3% lower on an organic basis and 7% higher on a reported basis. Like-for-like industrial automation was lower by 1%, commercial vehicle-related cells reduced 9%, energy was down 7%, life-sciences down 1%, and rail increased 3%.

Industrial automation revenues of GBP396 million were 1% lower primarily driven by a small decline in Europe which offset marginal differences in the balance of our core markets. Importantly the revenue profile in the year included a 5% pick up in the final quarter and that provides an early indication of the potential but clearly unconfirmed improvement in the sector.

Commercial vehicles sales were 9% lower and that reflected a 22% decline in North America due to lower truck from production volumes in that region. European and Asian commercial vehicle revenues were largely consistent with the prior year.

Operating profit of GBP119 million was 10% lower with a number of factors impacting the results included across lower overhead recoveries, following those weaker market conditions and our investments to support long-term growth. The results included a GBP4 million first-half gain related to the sale of legacy properties and that's not expected to repay in 2017. So the combination of lower volumes and the gain on property sales resulted in an operating margin of 16.7% against 17.8% last year.

You will recall from the market assessment that this division operates in four key sectors and our early plans were based on revenue growth in line with the market during 2015 and also 2016 and then accelerated growth after fixing and focusing the division. So throughout the course of these first two years, we've been working through an improvement plan which is all about radically simplifying the business and building stronger foundations for our future.

The plan was based on ambitious objectives and included a thorough review of industrial automation which is our largest sector and accounts for more than 50% of the divisions total revenues. In 2015 we completed a detailed region by region analysis which allowed an estimated target hit best opportunities, plan for great new products, and develop these manufacturing and distribution strategy for the future.

Our review identified the need for improved in new product development and we instituted processes including detailed competitive teardowns and accurate costs and project tracking. Well I'm pleased to say and you will have seen out in the foyer, the first of our new platform products will shortly be introduced to the market and we're confident they'll play a significant role in reversing the decline that we've experienced over the past decade.

That work has also delivered a significant new commercial vehicle project, which will start the feature in our divisional revenues from 2019 and the improvement in our plan performance has also opened the door to some great new opportunities, which are now well and truly in the works.

The balance of our projects included getting the organization and our leadership right, introducing its effective sales forecasting and the implementation of our new ERP system and with the hard work that's gone on over the past two years, I think we're now in great shape to drive those projects even harder.

This slide shows the results of Precisions six LEAN assessment and while not all companies achieve their targets, overall the average LEAN scores improved substantially from just 32% at the first benchmark to 66% in the end last year and the application of lean made terrific progress right across the division, with significantly improved productivity and included a 7% inventory reduction in the year. Our Seattle plant led the way with a score of 81%.

I'm also pleased to report that the Precision global quality system, which was introduced in 2015 helped reduce cost of quality by 28% and scrap costs were lower by 22% when we compare to 2015. Clearly the difficult economic environment across a number of Precision's key markets has impacted our underlying results and as a consequence, restructuring actions have been taken, which provided $4 million of profit benefit in 2016.

Included in these restructuring actions, were a number of actions we took place to improve the profitability and performance of our Brazilian business and its pleasing to report that those actions bought back business to a cash and profit neutral position in 2016.

Without question one of the most important projects being undertaken in Precision relates to the reorganization of our supply chain to reduce complexity and manufacture product closer to our customers. This project, codenamed Janus, is particularly focused at Europe, where the majority of our intercompany trading occurs, and it will ultimately determine the geographic footprint and the manufacturing strategy for the Precision division.

Now due to the importance of this project, Massimo has broken Janice into two phases, the first of which involve lower risk and more certain deliverables which are largely within our own determination. The first element to phase one is already well underway and involves the insourcing machining work and when complete, that will result in improved loading of our machine shops and increase our current utilization from just over 50% to a little over 70% at today's volumes.

The second element of the first phase involves the reorganization of our European and our U.S. businesses in the second driven verticals to focus our sales teams and the operating units at the best business opportunities. This work is now completed in the United States and the increased focus is already delivering early benefits.

The third element of this first phase involves a combination of our Continental Europe and now Western Europe businesses into a single European organization. Now the reorganization has already commenced and a live executive overhead has now been removed.

The fourth element of Phase one relates to the progressive transfer of back-office activities and component manufacture to our low-cost European operation in the Czech Republic. Now the total cost of excluding Phase one of project Janice will be in the order of GBP12 million of which GBP9 million is expected to be a cash cost in 2017.

The total savings will be approximately GBP12 million and about GBP5 million of that will be deliverable this year, but the longer term commercial benefit remains the real prize. A second phase of Janice offers wider options and is way more complex requiring additional and careful planning and involves in many instances the approval of our customers.

Now depending on which options, we select, the benefits could be considerably larger. However, the paybacks are considerably longer and would involve higher level of risk. And to be clear any sustained improvement in market conditions including the award of the significant commercial vehicle contract could impact our decisions on Phase 2.

To reiterate our preference remains to fill rather than reduce capacity and also will now properly equipped to make those decisions as and when circumstances dictate. So right now, Massimo is telling getting on with Phase 1 while working to finalize the plans in terms of Phase 2 and I’ll obviously provide a further update when we meet again at the interims in July.

So when you put it all together, Precision and Massimo have had a hugely busy 2016 and we're expecting an equally ambitious 2017. Some of the immediate successes include our long time and on budget development of the divisions first new platform products for more than a decade. The installation of a new executive of vertical organization in the Americas region and the benefits are already starting to show through.

The reorganization of the European regions into a single unified restructure resulting in reduced costs and improved focus on the market. The continued development in the divisions JD Edwards ERP system which successfully went live in screen over operations in February of this year, the success of the division's LEAN program which reduced inventories and is supported our reentry into the preferred supplier status of the commercial vehicle customers. And finally as two phased approach with clear definition to Project Janus to create a simplified supply chain and our manufacturing footprint for the future.

Now to Precision Engineering's outlook. The global industrial market remains mixed albeit with an improved fourth quarter providing a more positive backlog for our industrial automation sector. In commercial vehicle we're expecting Class VIII volumes to soften and which when combined with the conclusion of GBP13 million of CV contracts will result in lower revenues in 2017.

So based on current market conditions we're expecting first half organic revenues to be slightly lower than the first half of 2016 and after excluding 4 million of property disposals, margins will be comparable to the first half of last year. Now the benefits of further restructuring activities and new product launches are expected to deliver broadly equivalent margins for the full-year.

Turning now to hydronic engineering which as you know includes three industry recognized names Heimeier, TA and Pneumatex and is a leading provider of water-based heating and cooling systems for the residential and also for the commercial building sectors.

Revenue of GBP219 million was 1% lower on an organic basis and 10% higher on a reported basis. And while warmer weather impacted the heating season in the division's largest European markets, revenues in that region were marginally higher than the previous year.

Now due to project delays, sales in China were significantly reduced in the first half before recovering with positive momentum in the final quarter. North American sales reflected an overall increase of 6% in the year.

Operating profit of GBP52 million was 10% lower on an organic basis and flat on a reported basis and operating margins showed at second half seasonal improvement to 19.4% while full year margins at 17.9% reflected the impact of lower volumes and our ongoing investments.

Now given the continued softness in the European construction market, in January of this year Peter on the GBP5 million of restructuring including reductions in either hedged across his European businesses. These actions are expected to produce annualized benefits of approximately GBP5 million in 2017.

Turning now to hydronic's strategic activities. You'll recall from the market review that this division plays in three key sectors with an addressable market of around GBP2 billion and our plan is to capitalize on our premium market positions particularly in Europe. Over the period of our plan our ambition is to deliver 5% annualized growth and our new product successes and the execution of our over the China strategy provide confidence that this objective still remains achievable.

The previously announced entry into the actuator market and has received an excellent reception from the market. And in terms of new product development, Peter and his team have also maintained the impressive pace over the last couple of years with 13 new products launched in 2016 and a total of GBP55 million or 19% of the divisional sales were delivered from new products launched within the past three years.

Included in these 2016 launches, were a number of products targeted specifically at these over-the-counter sales strategy and they resulted in two new agreements being signed in Europe and those agreements were not having much impact in terms of 2016 results are expected to underpin increased writing into the years.

As we've also outlined, the lack of historic spend in the division's IT systems has contributed to excessive inventories and poor planning of the manufacturing operations. Hydronics new IT system was successfully launched into Poland and into Switzerland and now forms the basis for a structured rollout across the balance of these operations.

Moving on to LEAN, the division continues to achieve huge progress with a year-end assessment increasing to 76% against just 37% of the time of our first benchmark and you can see from the chart that Peter's businesses made great progress and have probably resided at 94% is well above our 85% world-class standard and this side now acts as a group showcase and it regularly hosts visits from across the whole of our operations, so that they can see best practice first end.

And in Germany, Peter's largest manufacturing site undertook a transformational project to improve this end casting operations. This required the entire operation to be dismantled, refurbished and rebuilt, while continuing to deliver products to our customers and the project proved a major success. To date we can close world-class performance with scrap rates reducing to 6% from 16% back in 2014.

So, to summarize hydronics 2016 successes, included the continued progress on new product development with new products accounting for 19% of its 2016 revenues. The over-the-counter strategy resulted in two substantial new contracts, which were signed in the year.

The refurbishment of our German foundry, which reduced throughout to world-class standards, the division continues to lead the group in terms of LEAN with scores increasing to 76% at the end of 2016. And finally, the new ERP system now provides proven standards for rollout across the balance of the division.

So, in terms of hydronic engineering's outlook while the European construction markets are forecast to remain subdued, the success of these new products and the over-the-counter sales are expected to result in organic revenue growth in the year albeit as usual weighted to the second half.

Operating margins are expected to show their normal second half improvement and they will of course include the benefits of restructuring.

So, I'll now turn to the full-year outlook for the Group, based on our current market conditions, we're expecting organic revenues in the first half of 2017 to reflect a similar percentage reduction to the first half of 2016 with margins slightly lower than the first half of last year and results for the full year are expected to include a second half bias, which will reflect the timing of our restructuring and of course normal trading seasonality.

So, I think in summarizing in terms of our strategic agenda, the hard work and the investments are now well underway with the benefits already apparent across all of our businesses. So, with that, let me introduce the balance of my team.

I've Roy with me who I'm sure you all know and is responsible for the critical division, has a terrible cold tonight, but recovering and Massimo who is now well and truly in command of Precision Engineering and Peter, who you all know is responsible for hydronics. They'll be helping us to answer your questions today.

So, could I ask that if you got a question, could you please put your hand up, remember to give you name and company when you get the microphone. Thank you very much.

Question-and-Answer Session

Q - Andrew Douglas

Good morning, team. It's Andrew Douglas from Jefferies. A couple of questions please if I can. Roy, on the value engineering, I think you doubled sales throughout the GBP80 million, which was doubling again from the prior year and how easy is it to keep that momentum going, I mean clearly you are doing well on your customer but can you keep that going?

And then secondly just on the - on pricing, I think last year we had original equipment pricing down a few percent, but lost that margins in the order book kind of flattish implying the pricing is okay, is that right or that few moving parts within that?

Mark Selway

Great, well good morning everybody and lots of sorry for that. Thanks Andy. So value engineering yes, we won GBP80 million of new orders last year and I'd say momentum is building, we really embedded this process right across the division, I mean on pricing also that linked two together, we have definitely seen pricing come down, I mean don't confuse the two things particularly in areas like North America in new construction was traditionally pricing been okay.

Pricing in China has been tough for the last few years, no doubt about it, pricing in India has been tough for the last few years but North America this has been, so the value engineering cost savings which I think on average we worked over about 15% are really allowing us to win in a much tougher pricing environment.

So to answer your question value engineering is really working well, I think momentum will build, we actually won the weekend before lost another GBP10 million order using what we are now doing which is virtual value engineering, so even if we can't actually get hold of, all the competitions products out there because these things can be huge as you know because in this room right then we can build up using public data enough of an image to be able to take even more cost out of products and that was GBP10 million project.

So sounds your question absolutely we can build more momentum with value engineering, I'm sure this is really doing well. Pricing generally surprising in the aftermarket still holding up, so no change in whatsoever of the November IMS, pricing in new construction is really traded we are using the offset to value engineering to maintain that margin in the order book as Mark said that's really what's going on. Thanks Andy.

Andrew Douglas

Then just one for Massimo. On Phase 1 of Project Janus, if you try - if you decide not to go through Phase 2 is that more you can do on the Phase 1 or is it GBP12 million for that, is there opportunity to extend that to the big heavy wins?

And secondly just on the fourth quarter actually a good number which I'm assuming you’re not going to extrapolate but could you figure out exactly what happened is it not be share gains or is it something specifically needs to not to be.

Massimo Grassi

Thank you, Andy good morning everybody. So, the first question is Janus second phase is not just about that was a manufacturing footprint so as Mark already mentioned we are preparing these phase, we are looking at the market evolution so, we decide by then but it's about manufacturing footprint, is about our supply chain, is about our organization, is about our business model. So we will have Phase 2 regardless the market and you may adjust the targets based on the market evolution.

With regards to the second question, yes we're very pleased with our results particularly in industrial automation in the last quarter of last year where we are positive by 5% and this is globally I mean we've been positive versus prior year in all regions. We have been part of the NFPA, National Fluid Power Association Conference in United States that was three weeks ago and there is a cautious optimism for 2017 overall but when we look at 2016, we believe they are been gaining market share because their overall pneumatic market is down 9% and on a full-year base we are about minus one in North America with Q4 plus five.

So we are quite pleased in terms of market share and our performance in industrial automation in North America. Thank you.

Mark Selway

Just stand to there, there is a degree of closure, we are not yet calling and turning the market and because at the end of the day, you will remember the second quarter of last year we were up about 3%, third quarter it was down 2%. So, I think in 12 weeks time when we've seen the first quarter behind us, and then my hope is that we’re going to sign there is a continuation of that progress that we're seeing same but you got to be very, very careful if you don't extrapolate one good quarter to say that we're seeing a turn in the market because we did see that same circumstance happened second quarter of last year that fell off.

Andrew Douglas

Absolutely.

Michael Blogg

Thanks. Michael Blogg from Investec. Could you just expand on that please particularly the competitive landscape in industrialization automation because some of your direct competitor's peers have strongholds if you like regionally. Is that the driver for the changes in market share on a global basis or is there something else going on?

Mark Selway

Yeah look if I can take it and Massimo can correct me where I am wrong, but look if you take a look at SMC for example, massive competitor, huge stronghold in the Asian regions and clearly that market has seen some really good progress. In fact, our own Asian business, which is quite small in overall terms in Precision has been up double digits in the last half of last year.

So, I think there is good progress going on in the Asian markets from what was a relatively lower base mark. In North America as Massimo said, I think if you take a look at our results against the more traditional North American peers, we outran them in terms of the industrial automation piece in the year.

So, I think we are picking up market share. Europe of course has been relatively benign in terms of its overall market, but we held our own in the European market as well. Is that a regional summary Massimo?

Massimo Grassi

It is a regional summary. On top of this, when we look at the overall market as Mark already mentioned, our Asian competitors are doing very well. They're taking advantage of operating in high growth markets, particularly in semiconductor industry in Asia where SMC is very strong.

We think we are over-performing the market in North America and we're keeping markets in Europe. So, that's a feature, so we're globally quite satisfied about our performances, but definitely there are competitors that benefit of high-growth market where they have a huge market share in Asia particularly.

Michael Blogg

Thanks. And could I just ask about the new platform product and industrial automation, what is your target for that? Is that particularly European products or North American or actually kind of addressable markets.

Mark Selway

Yes, we have three major families and as Mark mentioned you can look at the products and readers here and therefore here outside. So, three major families we are refreshing with brand new products and we will present this product at an over fare and these products are global.

We sell most of them in Europe because it's where we have the largest portion of our sales, but these products are global and represents an innovation for most of them since more than 10 years for the first time, we have great new products launched in the market.

Michael Blogg

Okay. Thank you.

Massimo Grassi

And possibly the way we'll play that out Mike is we're launching them in the European market. Those markets will also -- those products will see into Asia and also into North America and as their volumes pick up we've built them such that we can replicate the entire manufacturing process and build more volume for their markets, but we'll do it as and when market demand dictates.

So, we're really excited about way that's it and we've been very careful to make sure that we've got design capability that we can replicate easily from one country to next. So, it's really good plan and I think it's been well executed for so far so good.

Michael Blogg

Thank you.

Jonathan Hurn

Hi, it's Jonathan Hurn from Deutsche Bank. Just a few questions for me please, just firstly just a question for Roy, firstly just in terms of book-to-ship, you say that's at a lower level this year compared to last year, but can you just give us an indication of how much you need to book in '17 to meet guidance?

And second question on critical, is just in terms of GBP16 million of restructuring benefits that you'll see, how much of that will come through in the second half and how much of that will roll over into 2018?

And then the last one is just on Precision, just in terms of CV contract, when we expect the timing in terms of that please, thanks?

Mark Selway

Excellent, well thanks Jonathan, in terms of book to shipment, so if we talk firstly about the first half Jonathan, we got GBP15 million less book-to-ship in our guidance this year than we actually achieved last year because this is choppy market, tough markets. So, they don't get carried away, but just to give you a rough idea of what we think is a sensible contingency here, that's what we've got in the full year and leads to more like GBP20 million.

Second question about the restructuring, so I think you know that last year we delivered GBP12 million worth of cost reductions in critical from all of the plant changes that Mark talked about.

Obviously, there cost reduction was important. More important was the change in the footprints towards the higher growth markets. Most really very important for the future in this business and the reduction in complexity in the business we have now dealt with a total of nine sites. This year we are going to spend GBP60 million rationalization cost for labor line and deliver another further GBP60 million of benefit.

A slightly second half waited Jonathan, so it's probably more like 9, 9.5 in the second half versus the 60 but we did everything we can to accelerate those projects obviously to get on with it for the sake of the people but that was just to get the cost reductions.

So regards to CV, we are quite pleased with our pipeline of quotations and this is mainly related to Europe, mainly related to the new proportion of our sales but with few exceptions none of them, of a significant importance will hit our P&L before beginning of 2019.

Max Yates

Max from Credit Suisse. Could you talk a little bit about maintenance budgets in Critical and what you're expecting for next year and also bit of obviously Power looks like it was probably the weaker area within maintenance. Should we think about some of that being caught up next year or is that potential business which is now gone and we sort of reset on to this year?

Roy Twite

Thanks Max. Yes, I think makes Power is difficult, there is no question. You saw our new construction orders were down 23% obviously in the aftermarket that was hit as well. I don't see any sentiment change in terms of aftermarket. To deliver on IMS code I was explaining the amount of outages is less because they are pushing out the time between altitudes.

Also we often get follow-on orders so with a new construction order we will obviously try to get as frazzled with it so as new construction is coming down we are not getting so much space follow on orders. So I think Power is tough but I don’t see a change in that pattern. I think it will stay top in the aftermarket.

Max Yates

Do you see any offset elsewhere, is anywhere else within the aftermarket?

Roy Twite

Well obviously, if you look at our aftermarket good news was that the oldest work play in the second half and the big reason for that, they are obviously up now about 8% in the fourth quarter, again I didn’t get too worried about quarters but the overall sense was better, partly because we got very large over the nuclear space from Korea is about GBP8 million or GBP9 million in November. Clearly nuclear space will pick up particularly as the Japanese reactors switch back on that's one positive thing that will come over time, it's been slower than we thought but it will come back.

And of course our LNG space will build overtime as well no doubt about that. LNG space were down 3% last year but they were growing steadily in the years before that and this big facilities like Gorgon switch on, you'll start to see normal space come through in our LNG area.

Max Yates

And just the second for Mark, maybe on raw materials versus pricing. Do you generally see when raw materials and more volatile and going up like they are, does that give you more opportunity to be more flexible with prices and does it make negotiations on pricing easy with customers .

Mark Selway

No, not at all. If you take a look at it and Peter and I were running through his numbers as kind of Q1 forecast update, he probably got 2 million of headwinds in terms of material price movements in pricing and also in corporate coming forward. Fortunately we've got hedging program that we hedged about six months but in addition to that, we got value engineering processes that allow us to offset.

But look it's tough out there getting price increases. There is no doubt with that. I think we probably got pricing leverage in the majority of that sectors that we can work recover genuine legitimate increase in material costs but the ability to get more than that it's really tough Max.

Alex Virgo

Good morning. It's Alex Virgo, Bank of America, Merrill Lynch. I wondered if you could give us some color on how Q1 is started given the good end to the year. And then secondly just a bit more time strategically I suppose good work on the pensions that will balance sheet flexibility, good cash flow, what's the - are we going to be looking to M&A again this year now I think you originally talked about 2017 as being a year for big dividend precision, so hoping to comment on that.

Roy Twite

Thanks Alex. Two really quite important questions. In terms of Q1 and how we started really early case, I think my team for the first time, has pulled out the green cartridges, color cartridges in terms of our printing. So it has started out pretty positively in the month. Having said that, as Massimo said, so our industrial automation was up 5% in the last quarter. January was strong. February first two weeks were pretty good and then it fell off in the third week. So, it's a bit patchy. It's hard to call if there is any cyclical return happening, but we're pleased with the way we're performing.

A lot of the work we're done in leading up the factories, getting our new systems and structures right, getting the supply chain right, they're all starting to have some real impacted. Gosh, I can't wait till the market do turn up because I think the operational gearing in this business is going to be amazing, particularly for the foundation building that we've done.

I think in terms of M&A, you're absolutely right, the thing I am pleased about Alex is that we thought the management bench strength today that has significantly improved and Roy now has three really capable guys working under him running those divisions. He was able to move off the highway for rather 10 weeks.

So however long it seemed to Roy and the business didn't fall over. It all went magically well and the guys stepped up and did a good job. Massimo restructured his North American organization. We have a new management team in there that's doing a great job for overseas Asian business doing well. European restructuring we've got a great management there.

So, I am more confident that today the organization has the ability to do things and then execute well and as a consequence of that, I am spending more of my time at about talking to people and looking for acquisition opportunities where they come.

Now we're very clear, you can't a foolish deals at least of multiples. The markets seems to run away with itself in terms of multiples and expectations just because it's actually peaked today, we shouldn't consider it's always going to be cheap.

So, we're out there doing some things. We've got a list of things right down the fairway but as you know it's a bit of a roll of the dice as to when these things come and we'll be cautious as we move through and our good Chairman will make sure that it's entirely appropriate as we work through here.

Roy Twite

But Mark is actually really involved in this regional longer running a division.

Glen Liddy

It's Glen Liddy from JPMorgan. For Roy the value engineering is clearly a success in winning new business. Is it also starting to help your margins on the new businesses that you're winning?

And then for Massimo, insourcing is going to be an important feature of the business in the medium term. How quickly can you in-source things and what will that do to your utilization rates if we keep volumes stable, how quickly does your utilization rate ramp-up on the back of insourcing.

Massimo Grassi

Okay. Thanks Glen. In terms of value engineering, I think in terms of the current pricing environment Glen, what is allowing us to do is to win all these acceptable margins as you know, the margins in the order book are broadly the same as they were 12 months ago,.

So, I wouldn't say it's improving margins, but we're definitely winning projects that we had walked away from. I think what's interesting is you're going to benefit cycle and we can both remember the glory years of oil and gas, it was 2009, 2010.

Our oil and gas new construction business, which is about 20% of our business, prices were about 10% higher on average than I thought. So, you expect at some point where things get tight, hopefully pricing will improve again whenever that is, so did not call in that, but whenever that is and then certainly value engine will contribute to better margins I am sure of that.

Roy Twite

So, with regards to insourcing, we started the project about couple of quarters ago and when we started we were about 50% utilization of our machines. The target at the end of Phase 1 of Janus is to exceed 70%. So, we started a couple of quarters ago. We're very close to 60% now and in these kinds of opportunities, of course we go first with the low hanging fruit.

So, for the easier opportunities, and now we have huge opportunity that require some more preparation. So, we're very confident it is absolutely in our camp. So, the target is to exceed 70% utilization by the end of Phase 1 of Janus assuming constant volume.

Stephen Swanton

Good morning. It's Stephen Swanton of Redburn. Mark when started, you gave example in Precision engineering of product in order from the U.K. and Germany from back U.K. and finally getting somewhere.

This project won't address any of that complexity. I realize the project to might be most tougher thing but we address any of the continuances you have within your business.

Roy Twite

Yes Steven we have done quite a good of that already, still lots more to deal, lot of our actuator has got more frequent flyer miles before they get to the customer they are not going yet but we do need to get that products manufactured in the countries around. So we are upgrading the team in China now, it is fantastic. National team, new MD there, new supply chain management guys are now signing to put more of that manufacturing by segment and part of it I think is as we develop new products, developing the new supply base and those products in the region where we want to market those because picking them up and moving them is hard.

You have to build inventory, you have to get customer product, you have to go through a relatively lengthy process, so we will get there it is kind of a two face process, Janus Phase 1 gets a good degree of it done but we still get a hell a lot more to do before we finally get to where we need to be. Massimo did you want to elaborate?

Massimo Grassi

To add to much just mention that as part of our FIX8 projects reduced the complexity of our product portfolio, reducing SKUs from 450,000 to about less than 150,000 and this is a great contributor for us to also improve all this movement of product from a plant to another.

So for the rest, I don’t want to repeat Mark very well expressed what we are doing but that's also very important, so FIX8 has been a great contributor for us to simplify our supply chain.

Stephen Swanton

The second question, on management changes in precision or changes in management structure, does that do anything to change your reach to market or is this just a cost initiative or is it more to it, like I guess related to that the other businesses and we're couple of years in now and if you look at market to change, is there any sort of other changes that might happen in terms of structure of the businesses, management teams are focusing in critical and hydronic.

Massimo Grassi

Let's talk about the verticals structure and what that is all about, I think first out if we can.

Mark Selway

What we are doing in the transformation of organization into various, it is not about cost savings only, is about efficiency and effectiveness. So we understood that our customer attributes are very different vertical by vertical. Just one example, with 90% on-time delivery you can survive quite easily in an industrial automation environment. You see the you are simply out of business if you don't believe 99% to 100%.

So we wanted to design an organization that is really designed to satisfy our customers that's why we transform the organization and at the same time we took the opportunity to eliminate the few layers that I’m not adding value in our spirits off LEAN eliminating waste, so non-added value activity.

So, this transformation is completed in North America. We're very pleased we have for each vertical an MD with around the vertical and the regional managing director. With support functions that are responsible for the entire region.

We started in Europe, we completed the first phase which is merging Western Europe and Continental Europe and now we are executing the transformation into verticals that will be completed by the end of Q1 but this is not just about cost saving is really about having a organization design to improve customer satisfaction.

Stephen Swanton

And Roy, I think that your organization?

Roy Twite

I can probably add statement so, I think, you know what we've done effectively, we’ve been taking complexity and cost at Europe and we have been investing heavily in South Korea and you can see it marks that's now our best LEAN factory phenomenal capability we built in Korea brand new factory newly ERP system, they're launching our biggest product range now is going to come through South Korea, so phenomenal setup.

We just literally last year put three units together in China just outside of Shanghai, 20 kilometers outside Shanghai that has already got 60% LEAN score that facility. The Chinese teams have done that or obviously building now local capability. So we've got six projects to move products and when we move in critical it’s not just moving the manufacturing, you got to move the engineering, this is all engineers all of that moving that into China, this is all we can compete locally obviously much better cost base, much more responsive, much closure to the customer.

And then the final one is India and I think India is now our third best factory. Again we've been investing in India, we put ERP into India. So, again in those markets with huge growth potential overtime, we've been building capability and consolidating taking the complexity out of Europe.

Stephen Swanton

And Pete in your world unless you - you haven't told me something, your foreign businesses is usually getting it on, and building that over the counter but maybe you want to just talk about that.

Pete Spencer

Few things I have not told you but - so first of all I think good morning, clearly new products are going well 43 of them, so I'm very happy with that. Team operations are going extremely well. They have very good operational team in place. When it comes to the commercial, we not talked about over the counter strategy.

There is two flavors over the county customer. In Germany if you go and buy one of our products, the high great run, the guy will go from the warehouse round the backend to his stores and come out in a plastic bag.

And then if you go into over the counter customers in the U.K., you’re walking obviously a merchandizing shelf, and there is a lots of points of sales activity there and you’re trying to create inputs purchases.

We've been very strong on the German type of over accounts customers. We have been developing a seem to focus specifically on the marketing merchandizing side as well to create a pull-through. So we are building our expertise there and as a result we have secured some big contracts with those type of customers that were not being able to deal with before and not obviously is a great piece of business because it’s kind of annuity and its not project business that you wouldn’t - you would have to, its repeat business. So I’m very pleased that we are developing but there is still a lot more to do there.

Alasdair Leslie

Hi, good morning. Alasdair from Soc Gen. In market it sounds like you’re spending more time of your time spending the market now for acquisitions. So just on that potentially larger acquisition you’ve been talking about for some time and precision. What are the ranges of opportunities you’re seeing in the market?

Now and strategically do you want to look to add a fifth sector there or are you looking to strengthen one of the four identified sectors. And then does that improving outlook in the U.S. shop you’re focused on that market I think historically at least when you make comments around acquisition you were looking at North America as an opportunity and some of the policy uncertainty there kind of influence the timing. Thanks.

Mark Selway

Thanks Alasdair. Look I had a major one that would be a large-scale precision acquisition in North America because our North American revenues are only 20% of the total group. We’d love to do more with that. It’s the market we know well, we got good geographic footprint and we’d love to – love to leverage that base.

Look the acquisitions are a bit of role of the dice. We have noticed a number of multinationals in the U.S. We have recently done very big deals. We know what may happen as a consequence of those deals that could be unloved assets that come loose. I’m not suggesting there is any game plan in place to do that but meeting with these people on the regular base is creating relationships, allows us the ability that that the phone call could come at a point when they perform - when their portfolio changes.

Similarly there is a number of bolt-on size absolutely down at fair way and whether it's in Pete's world in hydronic in Europe, there is three or four right down the fairway acquisition opportunities and potential there that we continue to work.

There are mainly family owned businesses and things like health and succession planning and whether I want to go on holidays a lot more than they today, that older face family own businesses being sold and the Chairman and I throughout history have done a lot of family entities basis but you build relationships and you continue to develop those and those outcomes.

Also in Massimo world there is a number of bolt-ons 200 million size of all potentials that we continue to work on that our family entities basis and very much and Roy's world it's a same sort of thing. A number of family entities businesses that were interested in.

Now as I mentioned before Alasdair, we got to be very careful we don’t overpay in those environment. I was thinking to look at - you look at all sorts of assets as you look around the world. IPO in the unconventional drilling world at the moment again is 20 times 2018 expected earnings and 2018 is expected to be twice the EBIT of 2017.

So you kind of go, get your head around that. So what will be possibly do with those sort of assets and that would make sense. So we've got enough stuff within our current write-down in the fairway portfolio of businesses to keep us occupied and clearly one of the things that we keep on note with the Chairman and the rest of the Board is look, is there some opportunities in the fourth leg but quite honestly our focus is really about growing the businesses in the space that we can in, is it fair?

Alasdair Leslie

A quick follow-up just on IT investments. Do you expect those to go up year-over-year again or actually should they stabilize in it. Is there any difference in capitalization versus what we see expense rate in the P&L.

Mark Selway

They will stay down, I’m glad you asked that question, Alas. I got to comment the guys on just how well we've done. Lots of corporate guys through IT approach in that business in full absolutely flat, it's tough, it takes a lot of overhead, enormous amount of management time and energy to do it.

We've now got all three divisions with our cookie kind of models so they are fully verified and those models are now allowing us to put the map across each business. I think Roy is doing two new plants every six months, Massimo did three live in February of this month, in fact they are still delivering products.

Pete now has his standard and those standards are now got to be moved over to the balance of the businesses. So I would expect CapEx to be about flat for the next few years as we go through the continued rollout. Roy still wants to petrochemical business. We got to do Asia next in terms of the – in terms of Massimo and then you got to do you plants - Pete will finish earlier because he only has 9 or 10 to do.

Massimo has got a lot more and Roy's is going to then move into the complexities of petrochemical but what we can have done is absolutely de-risked it by having a model verify standard reporting, standard processes in Atlas to do without the risk in lot of other companies.

David Larkam

David Larkam from Numis. Quick one on hydronics, you mentioned in a couple of new contracts you weren't going forward. Can you give us some idea of scale of those or the potential scale of those?

And second Mark, when we do see a recovery, you mentioned got through. Can you talk about what level we should expect and whether you need to invest more in the businesses once the purse strings are a bit looser?

Mark Selway

Yes, I’ll take the last question first, because otherwise I’ll - I've got no idea. The net of all of it is you just know that we LEAN out the structure with the organization processes that last, take orders more usually, ship them through the organization.

So look I can't even dream about a better world today but I got to tell the operational gearing in this business is bigger than any organization I have ever been with. And I just can't wait until we start to see the markets improve, it’s going to be fantastic thing and Roy's business, we've taken 9 of these plants out half the number of manufacturing plants and what we've now got left, are absolutely where they need to be.

And Massimo world leaning up that SKUs, getting a supply times, it’s going to make massive difference and Pete's world in terms of his LEAN program. He can post that through to those factories and then it comes out the other end and if you look at our current operational gearing is very high, I think it's going to even be higher by the time we get to - get to the point markets of seeing market improve.

So sorry about that rather frenzy questions but I don’t even dream about that at this point. We got to manage today and Pete do you want to…

Pete Spencer

In our strategic funding over the counter business we're expecting to be GBP30 million to GBP50 million in other asset pioneers. We've made some good traction on that. So just to give you a couple of names there, one of our largest customers in Germany Cordes & Graefe, they're typically is an organization made dozens of acquisitions across Europe. They’ve now nominated us as their preferred strategic partner for all of our product categories. Previously it was just radiators.

So, that could be worth of potential GBP5 million this year. It's frustratingly long to get these deals during the contracts are always prolonged are really ones to get that one during early last year and get the benefits from it as it happens. It's late in December.

Coming into the U.K. we've signed a deal with Smith Brothers. It's the largest U.K. independent wholesaler like a vehicle for GBP1 million this year and we've also started with BSS as well, but really the output depends on how much effort we put into the marketing, merchandising, convincing promise to go into the wholesaler and my products rather than anybody else's.

So, there is a little bit of witchcraft in there that we're obviously trying very hard to speed up, but what it come from is over a period of the strategic plan it will be the biggest growth that we've done the business.

Mark Selway

Thanks, maybe we can take just these last two if you can. I wanted to get these guys out there selling stuff, so Mark if you can?

Mark Davies Jones

Yes, you mentioned de-risking in a different context, could you remind us the scale of your production in Mexico and whether you're considering any contingency plans in case a certain gentleman gets his wishes?

Mark Selway

Looking to grind since we have a Michaela door there, was about GBP70 million revenue I think. The sound is coming out of that business, about one third of that gets exported out of Mexico. So, that's the sort of risk that we've got but look geographically Mark, we're better located than any of our competitors in North America.

So, I think yes, it's a risk we'll have to say what the Trump administration finally does, but it's not particularly worrying as to keeping us awake at night because we've got this footprint of good capability elsewhere in the Americas that we can move to, but having said that, it's a great plant, it's very late and I think and unless something silly comes out of those policies, we look to grow it in the longer term.

Mark Davies Jones

Okay. Thanks.

Jonathan Mounsey

Hi, it's Jonathan from Exane BNP Paribas. A couple of questions please. On the new product launches, I think you've talked in the past about it being part of the drive for being reengineering the product to be best in class in terms of cost of manufacture.

So, I guess then these things are going to cost less to make. So, what are you going to do with that? Are you going to lower prices to take share or are you going to see it top through the bottom line? I guess you have a choice there is it going to be both?

And then secondly, on the ERP system, I went back and I was reading the transcript from '14 when you announced the plan to roll this out and I think there was some quite I am not going to say optimistic, but how quite a bit of was in capital release when it's firmly done. Now here we are in '17 and this is family progress as you said.

Are we moving at the sweet spot for that, are we seeing material working capital inventory release over the next 12-18 months?

Mark Selway

Two things, I'll get you some of those actuaries so you can get them toil down in your laboratories, but listen we're very excited about these new products. We've been losing market share year on year on year for more than a decade because we need it to refresh.

So, I think the first thing is, we're gaining our competitive leverage and then we're going to expect there is a good degree of cannibalization of our existing product line initially and then we would expect that there is some incremental growth of the company and I can't give you absolute numbers because it's the first launch that is happening at there, but Massimo, I think there is more excitement in your sales team.

Massimo has spent the first month of this year with all of the sales team globally. The enthusiasm is infectious coming out of those guys. It's really, really terrific. So, one would hope that then it's going to start to generate some incremental and as I said, reverse the trend to take launch we're seeing over the last few years. And your second question was…

Jonathan Mounsey

Just on working capital, the out piece.

Mark Selway

We got 7% reduction in Precision. We got 8% reduction in somewhere in inventories in critical. If you look at the last quarter, we came out with almost 14%. So, we're seeing it coming through and it will be a progressive thing.

At the end of the day it's hard for a big bank coming through, but period upon period improvements in working capital piece or a blip at the end of the year because we've obviously made stuff looking for a stronger winter period than we achieved. So unfortunately we got one that day.

The other thing that's important with those inventories, of course a type of profit here as you bring the annual inventories. So as you build inventories, you get overhead recoveries, you bring it down, you get under recoveries. So within those results we are absorbing millions in terms of reducing that working capital. So it's still lot more to come by the way, lot more to come and on track.

Jonathan Mounsey

Great.

Mark Selway

Thank you very much. I appreciate all the time you've been generous with. Thank you very much.

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