Rotork plc (ROR) Earnings Call Transcript & Summary

Good afternoon, everybody. I hope you can hear me. My name is Martin Lamb, Chairman of Rotork. I confirm that the dial-in facility is now open. And therefore, shareholders dialing in should be able to listen to today's proceedings. It is now 12:00 p.m., and I would like to thank you for participating in the 2020 Annual General Meeting of Rotork Plc. In what I think we would agree are extraordinary times requiring exceptional measures. As such, and before we begin, I wanted to provide some background as to the unusual arrangements we have put in place for today's meeting. You will all be aware, as referenced and set out in the notice of meeting, the U.K. government issued compulsory measures, restricting social gatherings in view of the ongoing COVID-19 pandemic, so-called stay-at-home measures. Prohibiting, among other things, public gatherings of more than 2 people. Accordingly, attendance at the Annual General Meeting by a shareholder of the company, other than one specifically required to form the quorum for that meeting is, therefore, prohibited under those stay-at-home measures. As a consequence, the Board has put in place a listen-only dial-in facility, so that shareholders can listen to the proceedings of the Annual General Meeting. Shareholders dialing in will not be counted as being present at that meeting and therefore, will not form part of the quorum, be able to speak or ask questions. Accordingly, in the unfortunate circumstances that any shareholder experiences any technical issues with the dial-in facility, this will not affect the business of the Annual General Meeting today. I apologize for the inconvenience caused by these changes and arrangements, but hope that the dial-in enables as many shareholders as possible to listen to the AGM proceedings. I do, of course, fully appreciate that the dial-in facility does not allow shareholders to ask questions. But I confirm that shareholders were given the opportunity to send questions to a designated e-mail address, the details of which were published in the notice of meeting and 2 subsequent regulatory news announcements, but no questions were received. You will have noted from my letter in closing the notice of meeting that voting at today's meeting on the resolutions contained in the notice of meeting will be conducted by means of a poll in line with best corporate governance practice. Myself, as the Chairman, may, in accordance with the company's Articles of Association, adjourn the meeting and/or propose any procedural or amendment resolutions to be voted on by way of a show of hands. In accordance with the company's articles of association with myself and Jonathan Davies, the Group Finance Director presence, I am advised that the meeting is now called. We will now move on to the business of the meeting, which was set out in the notice of meeting dated the 31st of March 2020. Before we commence the voting, our Chief Executive Officer, Kevin Hostetler, will via audio link, present a summary of the business highlights for 2019 and provide an update on how the company is responding to the challenges presented by COVID-19. We will also publish Kevin's statements on the company's website immediately after the conclusion of the Annual General Meeting. Kevin, I will now hand over to you, if I can.

Thank you, Martin. Good day, everyone, and thank you for being, like me, a shareholder in Rotork. My name is Kevin Hostetler, and I'm Rotork's Group Chief Executive. I'm very disappointed that it's not possible to present you live at our Annual General Meeting this year. The COVID-19 situation is without precedent and has caused significant heartache and disruption across the world. Please be assured that our priority is the health and safety of our colleagues and their families and all other stakeholders. We have taken decisive actions to manage the situation, whilst following instructions from governments and health authorities. Unfortunately, this includes the decision to ask that shareholders not attend the AGM in person. Whilst taking tough decisions such as this one, I should remind you that at Rotork, we are absolutely committed to keeping the world flowing for your future generations through providing our essential products and services. I would like to recognize the extraordinary fortitude and determination of all of our people in recent months, be they in our factories, in site services, in our offices or currently working from home. I'm also really proud of the efforts our people are making to support our local communities. An example of this, recognizing the shortage of protective equipment for doctors and nurses, our U.K. team designed a fantastic face shield. We are now manufacturing these shields in numbers of plants around the world and distributing to local hospitals. This is only one of many examples. Please be assured, we are also doing all we can to engage with support and help the Rotork team worldwide as well as implementing the strictest safety rules at all our sites, we have increased our group-wide communications. Our weekly well-being tips have been well received and we've had a good take up of desk yoga. Let me begin with highlights from 2019, then I'll briefly discuss the progress we are making on our growth acceleration program, provide an update on COVID-19, and I'll conclude with the few words I can regarding our outlook for 2020. My second year at Rotork has been one of significant progress, despite 2019 seeing a more challenging than expected external environment. Global economic growth lost momentum through the year, and 2019 is now expected to have seen GDP growth of around 2.5% versus earlier forecast of above 3%. This is the slowest global growth rate since the financial crisis of 2008. The combination of this challenging macroeconomic environment, a demanding comparison period and absent orders and revenues from sanctioned countries meant revenue growth proved elusive. We are pleased, however, to report full year order intake grew 1.5%. Despite our sales declining, we continue to execute, as evidenced by a 160 basis point improvement in operating margins, now up to 22.6%. A 260 basis point increase in return on capital employed to almost 32%. Cash conversion of 131% and a strong balance sheet at period end, including net cash of GBP 106 million. Moving on to our growth acceleration program. I'm pleased to report that we have laid the foundation that drives our future growth and have successfully initiated our operational transformation. Our endeavors in becoming easier to do business with, reorienting our customer-facing teams and accelerating our innovation in new product development are taking shape. We continue to make progress in lean manufacturing, globalizing our supply chain and business simplification in terms of both facilities and product line rationalizations. These efforts, along with our keen focus on productivity, are yielding tangible benefits and increasing our cyclical resilience. We've strengthened our leadership team and created our One Rotork movement, emphasizing bringing our company together under our revised purpose of keeping the world flowing for future generations. Our next-generation IT platform, which yields additional future benefits, is well underway with elements having already been deployed this quarter ahead of the fuller implementation in 2021. Our investments in our Rotork Site Services business are bearing fruit, and we were pleased to disclose recently that Rotork Site Services grew in 2019 to achieve 20% of group revenues. Moving to our outlook for 2020. When we reported our results on March 3, the impacts of COVID-19 were only just starting to be felt. At that time, we said that absent COVID-19, we were planning for modest sales growth and margin progress in 2020, albeit with margin progress more gradual, reflecting our investment plans. On March 31, we updated the market on actions we were taking in response to the threat posed by COVID-19, which in a very short period of time had made the world considerably less certain. We reported that our ability to deliver products and services to our customers had remained good considering the demanding environment. However, we had started to experience some disruption. This was due to our actions to protect our people as well as supply chain and logistics challenges. We had to temporarily close certain facilities. And whilst we plan to remain open, we will not hesitate to close sites if required or if we believe there is risk to our colleagues. COVID-19 and the consequential drop in energy demand in global oil prices is, of course, impacting our customers. In several of our end markets, customers have announced high-level plans to revisit their capital and operational expenditure commitments in light of COVID-19 uncertainty and the near-term requirement to conserve cash. It is too early to fully assess the impact of each. Given the uncertain outlook we currently face, we are taking steps to reduce the impact on our business. Actions taken across the group include a recruitment freeze, postponing salary increases, restricting discretionary spending and institution of greater flexibility in the workforce. Given these unprecedented times and our increasing awareness of the difficulties some of our global colleagues may face in light of the COVID-19 pandemic, Rotork has initiated the formation of an employee benevolent fund to provide short-term supplemental emergency support to those past and present associates or eligible dependence facing serious financial hardship and who cannot afford housing, utilities and other basic expenses as a result of certain unforeseen and unpreventable circumstances or personal tragedies. Our ambitious growth acceleration program continues to drive cost benefits from procurement, site improvement, continuous improvement, lean and organizational change. We are reviewing whether there are cost benefits we can bring forward or investments we could delay. In order to ensure that Rotork can continue to act from a position of strength and recognizing the exceptional set of circumstances and the mitigating actions the business is taking, the Board has decided it is not -- it is appropriate to withdraw the recommendation to pay the final dividend. We will reassess this position later in the calendar year when the situation is clear. We understand the importance of our dividend to our shareholders and did not take this decision lightly. The good news is that Rotork's financial position is strong. The group had circa GBP 110 million of net cash as of the 29th of March 2020. We remain in advanced discussions with the group's banks to extend our funding arrangements beyond their current term. Additionally, our application to the U.K. government's CCFS scheme has been conditionally approved. I would like to thank our lending partners for their continued support. As regards to guidance, given the unprecedented level of uncertainty, it is not possible for the group to provide an outlook for 2020. Thank you again for being a shareholder in Rotork. I very much hope you and your family and friends stay well, and I sincerely hope we can meet in person next year. Thank you for listening.

Thank you, Kevin. I shall now turn to the formal business of the meeting. I am pleased to report that we have received a substantial number of proxies representing approximately 82.5% of our shares. The results of each vote for, against and votes withheld would normally be shown on a screen at the Annual General Meeting immediately after each resolution is voted on and therefore, the result of the vote on each resolution is not typically read out at the meeting, but is included in the final results announcement released to the London Stock Exchange through our regulatory information service as soon as possible following the meeting. These are, of course, anything but normal circumstances, and shareholders only have a dial-in listen-only facility. For these reasons, shareholders were requested to appoint a proxy and provide voting instructions in advance of the Annual General Meeting. A substantial number of shareholders did this and appointed myself as Chair of the meeting as their proxy. I will table the resolutions to the meeting and then pause for poll cards to be completed. I will, of course, complete the poll cards for all those shareholders who appointed me as their proxy in accordance with the voting instructions received. Please bear with me during these pauses in our proceedings for voting, we will endeavor to keep these to a minimum, and I will provide some feedback on the voting as each resolution or group of resolutions is voted upon. Again, as referenced earlier, the full details of the votes will be released to the London Stock Exchange following the conclusion of this meeting. Finally, I will close the meeting immediately following the vote on the last resolution. The meeting has been called to deal with 19 resolutions set out in the notice of meeting. Resolutions 15 to 19 are special resolutions and must be passed by a majority of not less than 75% of votes cast. All other resolutions are ordinary resolutions requiring a simple majority in order to be passed. Moving to the resolutions set out in the notice of meeting. I will, where I think it is appropriate to do so, group the resolutions together for the purposes of voting. I will now propose Resolution 1 relating to the annual report and accounts to the meeting. Please complete your poll cards now. [Voting]

Thank you. Voting is now closed, and I declare the resolution carried by the necessary majority with a vote in favor of well over 90%. I will now propose Resolution 2 relating to the approval of the Director's remuneration report to the meeting. Please complete your poll cards now. [Voting]

Thank you. Voting is now closed and I declare the resolution carried by the necessary majority with a vote in favor of well over 90%. I will now propose Resolution 3 relating to the approval of the Director's remuneration policy to the meeting. Please complete your poll cards now. [Voting]

Thank you. Voting is now closed, and I declare the resolution carried by the necessary majority with a vote in favor of well over 90%. I now put Resolutions 4 to 10 to the meeting, being Resolution 4 relating to the reelection of Ann Christin Andersen Anderson, Resolution 5 relating to the reelection of Lucinda Bell, Resolution 6 relating to the reelection of Tim Cobbold, Resolution 7 relating to the reelection of Jonathan Davis, Resolution 8 related to the reelection of Peter Dilnot, Resolution 9 relating to the reelection of Kevin Hostetler, and Resolution 10 relating to the reelection of Sally James. Please complete your poll cards for each of the above resolutions now. [Voting]

Thank you. Voting is now closed, and I declare each of the resolutions carried by the necessary majority with a vote in favor of each resolution of over 90%. As Resolution 11 concerns my own reelection, I will ask Jonathan Davis to propose this resolution.

I will now propose Resolution 11 relating to the reelection of Martin Lamb to the meeting. Please complete your poll cards now. [Voting]

Thank you. Voting is now closed, and I declare the resolution carried by the necessary majority with a vote in favor of well over 90%. I will now pass back to Martin.

Thank you, Jonathan. I will now put Resolutions 12 to 14 to the meeting. Being Resolution 12 relating to the reappointment of Deloitte LLP as auditor, Resolution 13 relating to the auditor's remuneration and Resolution 14 concerning the Director's General authority to allot shares. Please complete your poll cards for each of the above resolutions now. [Voting]

Thank you. Voting is now closed, and I declare each of the resolutions carried by the necessary majority with a vote in favor of each resolution of over 87%. With apologies, I have been informed that there are some clerical numbering errors in Resolutions 15 and 16, which we need to resolve before we vote on Resolutions 15 and 16. Therefore, in accordance with Article 61 of the company's articles of association, which authorizes clerical amendments to a resolution to be made. I now propose to the meeting the following clerical amendments to Resolution 15 to replace references in the text of Resolution 15, which cross referred to Resolutions 15 and 16 to be read as references to Resolutions 14 and 15, respectively. Further, I propose clerical amendments to Resolution 16 to replace references in the text of Resolution 16, which cross refer to Resolutions 15, 16 and 17 to be read as references to Resolutions 14, 15 and 16, respectively. I now propose to put this proposal to the vote on a show of hands. Voting is open. Please raise your hand to vote. Those in favor, those against. [Voting]

Thank you. Voting is now closed, and I declare the resolution carried by the necessary majority. I will now put Resolutions 15 to 19 to the meeting. Being Resolution 15 as amended by the above amendment resolution concerning the Director's general authority to disapply preemption rights. And Resolution 16, again, as amended by the above amendment resolution concerning the Director's specific authority to disapply preemption rights in connection with share allotments for acquisitions and other specified capital investments. Resolution 17, concerning the company's authority to purchase ordinary shares, Resolution 18 concerning the company's authority to purchase preference shares and Resolution 19 concerning fixing the notice period for General Meetings. Please complete your poll cards for each of the above resolutions now. [Voting]

Thank you. Voting is now closed, and I declare each of the resolutions carried by the necessary majority with a vote in favor of each resolution of over 87%. Ladies and gentlemen, that concludes this year's Annual General Meeting. The voting results will be audited by our Registrar, and the final results will be announced to the London Stock Exchange through our regulatory information service as soon as possible following this meeting. I very much hope and expect to see many of you in person next year as we return to more normal circumstances. Thank you for your patience, understanding and participation in this year's meeting. I now declare the meeting closed.