Rotork plc (ROR) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today. As we discuss our 2023 interim results. It's great to see you all here today. So alongside me is Jonathan Davis, and we also have Dorothy Thompson, our new Chair; and Andrew Carter in the audience. So this first slide is a reminder of our purpose keeping the world flowing for future generations. At this point, I'd like to thank all Rotork colleagues for truly living our purpose for embracing our Growth+ strategy and for all their hard work in delivering these first half results. It was also great to host our senior leadership conference earlier this year, spending time discussing the many opportunities that they see in delivering Growth+. Before presenting the more formal highlights, I wanted to start with my reflections on the half. I'm pleased with the first half performance. We delivered another period of double-digit year-on-year growth in orders and sales despite some residual supply chain challenges. We're seeing the benefits of Growth+. The target segment strategy is working with target segment sales delivering premium growth ahead of the group growth rate. We're making good progress with our enabling a sustainable future initiative including progress in decarbonization, electrification for methane emissions reduction and LNG. The innovative products and services strategy has great momentum with well-received product launches in the period and a very exciting new technology platform acquisition completed with strong orders ahead of sales. We entered the second half with a record order book, giving good visibility on the full year. On to the highlights. Orders and sales were ahead double-digit year-on-year on an OCC basis, with good growth continuing in the second quarter. Oil & Gas order intake was the highest it's been in the 6-month period since 2019. Our Growth+ strategy has momentum and is delivering with target segment sales comfortably outgrowing the overall group in the half. It's important to note that we continue to experience some supply chain challenges for example, availability of finished circuit boards, and we're working hard to solve these issues. Operating margins rose to 19.5% after Growth+ related investments and the bringing forward of salary increases by 3 months to support colleagues with cost of living challenges. Return on capital employed rose year-on-year to close to 33%, demonstrating the value creation potential of the group. We had strong cash conversion in the period though net cash was slightly lower, reflecting a one-off GBP 20 million pension contribution. Safety is the highest priority at Rotork, and I'm pleased to report that we achieved a significant year-on-year improvement in our lost time injury rate. So in summary, a good first half performance. With that, I'll now pass over to Jonathan for the financial review before coming back to discuss Growth+ development and the outlook.

Thank you, Kiet, and good morning, everybody. The first half saw double-digit growth in orders and revenue. Order intake in the period was 11.9% higher than the prior period on an organic constant currency or OCC basis. Orders grew in all divisions, and we had double digit in Oil & Gas and Water & Power. Revenue was GBP 335 million, 17.2% ahead of 2022. With delivery performance benefiting from an improved supply chain, although some challenges remain. Adjusted operating profit of GBP 65 million was 20.2% higher than the prior period, and margins were 50 basis points higher. Return on capital employed rose 570 basis points to 32.7%. Adjusted earnings per share was 5.8p, a 19.7% increase. Currency was a circa 2% tailwind, increasing revenue by GBP 6 million and adjusted operating profit by GBP 1 million. Cash conversion was 116%, reflecting the more typical working capital movements in the first half of this year after the unusual revenue phasing in Q4 of 2021. We paid a GBP 20 million special contribution to the U.K. Defined Benefit Pension Scheme to help fund a buy-in in the period. And the 2.55p interim dividend is 6.3% higher than the prior period and is 2.3x covered on an adjusted earnings basis. Group revenue rose 17% in the first half on an OCC basis, with all divisions growing at similar rates to the group. Oil & Gas benefited from increased activity and with upstream, particularly strong, including sales related to the electrification to reduce methane emissions. Asia Pacific remained our largest region as measured by in destination sales, though both EMEA and Americas grew faster in the period. The Asia Pacific sales growth was held back by the non-repeat of a larger Oil & Gas project. The other 2 divisions saw growth in Asia Pacific with Water & Power, particularly strong. EMEA sales grew double digits, benefiting from Oil & Gas strength and higher activity in the Middle East. Americas revenues were also ahead double digits with all 3 divisions reflecting strong growth. And Rotork Site Services performed well, with revenue growth up 17%, broadly in line with the group overall. Its contribution to group sales were therefore unchanged at 19%. The OCC adjusted operating profit bridge highlights the positive contribution from both volume and price in the period. Volume increases reflects the significantly higher number of units sold this period as supply chain challenges reduced. Net price mix reflects the estimated benefit from price increases over and above the impact of component cost increases, net of sourcing savings as well as the other normal elements of product and geographic mix. In full year 2022, we talked about 2/3 of the revenue increase being attributable to price. But in this period, the reverse is true with around 1/3 of the revenue increase being price and 2/3 being volume. Direct costs, those above gross profit are GBP 6 million higher than the comparative period, partly driven by higher people costs supporting the higher volume. Gross profit has increased 100 basis points to 45.6%. The GBP 14 million investment stroke overhead increase is also largely related to people costs. Looking across both direct costs and overheads, people costs account for GBP 15 million of the GBP 20 million increase. This GBP 15 million includes the higher-than-usual global pay increases, which were brought forward 3 months, reflecting the higher cost of living as well as headcount increases in support of Growth+. So the roughly GBP 17 million of price benefit covered the unusually high labor inflation, any material cost increases and the adverse product mix impact. The higher volume funds investment in Growth+ and has led to higher margins with adjusted operating margin 50 basis points higher at 19.5% in the period. We started the year with net cash of GBP 106 million, which reduced to GBP 98 million at the period end, which was a much improved cash conversion of 116%. You may remember that the unusual phasing of revenue towards the end of 2021 and the reversal in December 2022 drove a large working capital outflow in 2022. Working capital in reversal of last year was a small inflow in the period, even with the growth in revenue and net working capital as a function of sales reduced from 28.7% in December to 25.9%. Trade receivables reduced from 20.9% of sales in December to 18.7% and also reduced from 58 days sales outstanding to 56 days. Inventory balance sheet rates was also just lower than December and reduced as a function of revenue. The 2 largest outflows in the period were dividends the GBP 37 million 2022 final dividend. And the pension contribution. In June, we made a GBP 20 million special contribution to the U.K. Defined Benefit Scheme to enable it to purchase bulk annuity. Whilst the scheme now shows a GBP 9.3 million surplus on an IAS 19 basis, it's still not quite fully funded for the actuarial valuation adjusted for the special contribution. Turning to Items below operating profit in the P&L for the period, which are largely the same as the previous period. Gains on property disposals come from the sale of locations vacated as part of the footprint optimization or sales optimization programs. Transformation costs are largely the configuration costs of the new ERP system, which are no longer capitalized. The new ERP system successfully went live in Bath in February and is scheduled to go live a head office shortly. This will be followed by a global rollout program. Finally, tax rates have moved slightly higher this year. The headline effective rate increased 10 basis points and adjusted effective rate 60 basis points to 23.9%. The higher U.K. tax rates are the largest single driver in this increase. Turning to the divisions and starting with Oil & Gas. Divisional sales grew 16.4% driven by the EMEA and Americas regions. EMEA reported double-digit revenue growth in all 3 segments, upstream, midstream and downstream, benefiting from increased activity in the Middle East. The Americas also grew double digit in all 3 segments and reported the strongest overall growth, including an increase related to electrification to reduce methane emissions in upstream. In Asia Pacific, double-digit revenue growth in upstream was not sufficient to offset sales declines in midstream and downstream and the revenue declined overall. Adjusted operating profit was GBP 31 million, a 30% increase year-on-year. Positive pricing more than offset adverse product mix and any impact of higher materials with strong volume growth, improved productivity and a slower overhead growth rate, operating margins increased 210 basis points to 21.4%. CPI sales were 17% ahead with all segments and all regions higher. Asia Pacific sales grew, benefiting from our coverage expansion initiative and growth in target segments, including HVAC, chemicals and metals mining. EMEA revenue growth was in the mid-teens. The Americas were CPI's fastest-growing geographic region, led by an increase in process sales. Adjusted operating profit was GBP 25 million, 8% higher than the prior period. Adjusted operating margins fell 180 basis points to 22.7%. CPI remains the highest margin division despite this reduction. Particularly strong revenue growth in fluid power actuators contributed to an adverse product mix. And even with improved labor productivity, gross margins declined 120 basis points. With overheads increasing slightly ahead of the group average as a result of geographic sales mix, this also contributed to lower margins. Turning to Water & Power. Sales were up 19% against a particularly supply chain disrupted comparative period with both segments and all regions ahead. Asia Pacific sales were mid-teens ahead, driven by water & wastewater. Americas sales grew double digit, driven by higher water sector activity and was the fastest-growing region despite a reduction in power sales. EMEA sales grew, benefiting from higher power station refurbishment revenues whilst water was broadly flat. Adjusted operating profit was GBP 17 million, 26% higher. Volume accounted for more of the revenue increase in Water & Power than the other 2 divisions. And with a positive product mix, this more than covered the material cost increases. This resulted in margins increasing 110 basis points to 21.8%, despite overheads growing fastest in this division. As we turn to the second half of the year, the key drivers should remain consistent with the first half. We anticipate price will account for around 1/3 of revenue increase in the full year as the January 2023 price increase starts to impact revenue across more product ranges through the second half. With material cost pressures currently not an issue, and with most wage increases effective on first of January, so salary cost per head consistent in the second half, we're not expecting to implement a second price increase this year. However, we do expect to continue investment in people this year to support Growth+. Hanbay, the Canadian electric actuation company purchased last week will make a small contribution in the second half. With annualized sales of around CAD 10 million and margins in line with the average group margin. Sterling has strengthened through the first half. Our guidance in March for a full year, 1.5% tailwind is now out of date. Exiting the first half at 1.28 for U.S. dollar and 1.17 for euro, applying these rates to the whole of the second half, this would be around a 1% headwind to revenue and profit for the full year. Finally, CapEx, in the full year, it's expected to be around GBP 14 million with a further GBP 12 million spend on business transformation rollout costs, which are expensed below adjusted operating profit. So in summary, double-digit order growth has built on the positive order momentum through last year with the supply chain much improved over the comparative period, revenue has also grown double digit but a book-to-bill of 1.16x in the first half means we have a record order book and good revenue visibility into the second half. Whilst much improved, managing supply chain challenges to improve lead times remains a focus. Investment in the Growth+ strategy is yielding results and will continue in the second half as we also gear up to drive the business transformation rollout program. I'll now hand back to Kiet.

Thank you, Jonathan. I'll now provide an update on the Growth+ strategy before turning to the outlook. So as a reminder, Growth+ is all about profitable growth. The plus element covers key areas in addition to growth, items linked to delivering a sustainable future that benefits all our stakeholders. Growth+ is designed to deliver our ambition of mid- to high single-digit revenue growth and mid-20s adjusted operating margins over time. The 3 pillars of Growth+ are target segments, customer value and innovative products and services. Target segment, as a reminder, refers to chosen segments where there are significant profitable growth opportunities and where we have the right to play. We estimate the market growth rate for our target segments to be high single digits. And that, in total, they represent around half of group sales. Customer value is about putting the value we provide to our customers at the forefront of everything we do. Coupled with our product differentiation, activities in this pillar are designed to enhance our customer experience when dealing with Rotork. Innovation is the lifeblood of Rotork. Our innovation focus is aligned to our chosen target segment with the megatrends of automation, electrification and digitalization. Enabling a sustainable future underpins the 3 pillars, and captures our determination to achieve sustainability. To facilitate the delivery of Growth+, we will continue to make investments, particularly in our people. This slide highlights some of our first half successes delivering Growth+. In target segments, we've made encouraging progress in methane emissions reduction, strengthened our already strong position in LNG, continued our growth in the battery-related metals and mining sector and stepped up our pursuit of desalination projects. Decarbonization is now a target segment in all Rotork divisions having been initially led by CPI. This reflects the importance, the breadth and the growth opportunities of the exciting opportunity. I'll talk more about target segment success in a moment. In customer value, we continue our business transformation, implementing and integrating common systems and processes throughout the group. This will improve efficiency and deliver improved lead times and enhanced customer experience. Innovative products and services also has great momentum with recent product launches being well received. We've also completed a small technology platform acquisition, and I'll talk about both shortly. And finally, we formally incorporated our sustainability goals into our product development process. I wanted to take a few moments to revisit Oil & Gas' target segment, which we first discussed in November, mainly methane emissions reduction, LNG, infrastructure growth and Site Services. Reduction of the sector's methane emissions is widely seen as one of the most important measures to limit near-term global warming. The International Energy Agency just a few weeks ago, published a report strongly advocating the feasibility of eliminating emissions and calling for a step-up in global policy and financing efforts. Methane looks set to be a major topic at COP28 in just a few months' time, moving from being important for some to being a global industry priority. Over the last 12 to 18 months, the outlook for the broader Oil & Gas industry has brightened and with it, the outlook for industry spending. The chart on the right shows a research forecast for large Oil & Gas projects over the next several years. highlighting the upturn in the cycle more generally, but also specifically for LNG. Rotork is less exposed overall to large CapEx projects than it is to OpEx. That said, large projects are important in part to capture the aftermarket. Additionally, given the industry's focus on efficiency of existing assets, we would also expect to see the spending on automation and upgrade projects grow. In short, a good time to have methane emissions reduction, LNG infrastructure and Site Services amongst oil and gases chosen target segments. I promise to talk some more about the target segment successes. So starting with Oil & Gas, we've made good progress in methane emissions reduction. With the Rotork IQTF having been established as the leading electric actuator for upstream wellhead choke valve applications. In LNG, we are working closely with end users, EPCs and consultants and believe we've strengthened our already strong position and have recently won a large equipment order for a major liquefaction project in Southeast Texas. Moving to CPI. We continue to make progress in the battery-related metals and mining space and a highlight was being chosen to supply the actuation package to a greenfield nickel/cobalt processing plant in Indonesia. In Water & Power, the team won a very significant network automation project in the Middle East with an important new customer, with whom we're actively discussing additional opportunities. Moving on to innovation. During the period, we launched the IQ3 Pro electric actuator and smartphone app. The new IQ3 Pro offers an improved user experience and enables intelligent configuration and operation. It offers greater connectivity than its predecessor, making it easier to export logged performance data on to the cloud and into the intelligent asset management system. The new and more powerful processor extends the actuators performance envelope, for example, enabling a quicker shutdown something required for North American upstream customers. The IQ3 Pro is also backwards compatible, an important consideration for IQ3 owners. Earlier in the year, we launched the latest generation of our condition monitoring and analytics software, which we call Intelligent Asset Management, or iAM. Customers are looking for greater process uptime as well as cost and risk reduction, and iAM provides prompt, actionable insight through its easily accessed cloud-based solution. Our launch was well timed with the predictive diagnostic market strengthening and the new service having been well received by customers. In one great example, Rotork Site Services colleagues free issued a small number of iAM reports through a refinery customer in Colombia. Having seen the information contained in the example reports, the customer signed up to an annual service contract covering their Rotork assets and use the data to completely rework their annual maintenance program. And finally, on the innovation topic, I'm pleased to announce that last week, we completed on an acquisition, adding to our technology platform, a compact, high talk actuator range. Hanbay is a company we've followed for some time with the technology aligned to our Growth+ strategy and expands our offering providing sales opportunities for all 3 divisions. The compact electric actuators can be used in hazardous applications and strengthens our decarbonization product suite, especially in hydrogen applications. With the market trends of electrification, this is an ideal product range to substitute pneumatic solutions over time. Turning to the market outlook and starting with Oil & Gas. The recovery in sector activity, first experienced in the second half of 2021 has continued. Hydrocarbons have played or will play an important role in the world's energy mix for years to come. And following an extended period of industry under investment, a catch-up is now underway. Energy security risks within Europe has resulted in LNG playing a larger role in filling the deficit. We continue to see good opportunities for environment-related activity, such as work to reduce methane emissions. Whilst Oil & Gas prices have fallen from the highs of 2022, they remain above incentive levels in most regions and project activity remains elevated. Switching to CPI. CPI continues to clearly see the benefits of its focus on target and niche segments, providing intelligent flow control solutions. The division is in particular, seeing business wins in target sectors, such as HVAC, mining and specialty chemicals. Overall, we see good momentum despite recovery in China having been delayed. And finally, to Water & Power. The division is benefiting from increased global water infrastructure investment, which is expected to continue. It's seeing investment in several areas from building new water networks to improving existing ones. Customers are increasing their focus on efficiency and water quality with digitalization an important trend. These are all areas where Rotork can add value. In Power, we continue to see refurbishment opportunities as well as good activity in smaller but higher potential markets such as high-voltage DC. Turning to the outlook and summary. Rotork is a first-class engineering group and market leader with a strong purpose, keeping the world flowing for future generations. We have a fantastic commercial product and service offering with a great opportunity to create value for all stakeholders. We are committed to sustainability and will play a significant role in the flow control intensive new energies and technologies that will deliver a decarbonized economy as well as greater security. We are committed to delivering mid- to high single-digit revenue growth and mid-20s adjusted operating margins over time. I'm pleased with our performance in the first half, in particular, the double-digit year-on-year growth in orders and sales, despite still being impacted by residual supply chain challenges. The improvement in operating margins and the progress made under all the Growth+ strategy pillars. I'll finish with the outlook we published this morning. The outlook for all our divisions is positive, and we entered the second half with a record order book. Whilst mindful of residual supply chain challenges, we anticipate delivering further progress in 2023, in line with expectations on an OTC basis. Thank you again for your interest in Rotork. At this point, I'll open the floor to questions.

It's Rory Smith from UBS. Firstly, apologies for kicking the table there. I have 3 questions. I'll take them one at a time if that's okay. Firstly, on CPI. Can you just help us understand the sort of phasing of orders, the comp effect there and what that looks like for the second half and also the margin outlook in CPI given the mix, and if possible, to draw out which particular sort of projects or regions or end markets were drivers of that electric versus fluid power mix in CPI, firstly, please?

Yes. No problem. CPI orders grew in the first half. But if we look back to last year, CPI grew H1 '22 on H1 '21 at roughly 20%. So the growth is on top of that already high growth. Within the period of the H1 period in 2022, we had 2 large, what I would say, one-off orders where customers anticipated a second price rise and brought forward their orders. So we essentially brought forward some orders from H2 into H1. So despite that not repeating in H1 '23, the base business of CPI, the underlying business has filled those and also delivered growth on top of that. So overall, we're pleased with the performance of CPI and that's generally the phasing. In terms of the margins, the numbers you see are related to product and geographical mix. So in H1 last year, we saw strong growth in China. However, in H2, China declined due to the lockdowns. This year, China is coming out of the lockdowns, and the business is increasing, but it's less than last year. And within China, CPI sells quite a high number of instrumentation projects or products, and they carry a high margin. So we have a negative mix in terms of that. At the same time, we've also had an increase in business in North America related to mining projects. So that is the mix effect there. over the course of the whole year, we expect that margin to improve. Do you want to add anything to it, Jonathan?

I think you've covered it.

And second question, Jonathan, you mentioned the rollout of the ERP system over the next sort of 3 to 4 years. Would you be willing to put a sort of number to that run rate benefit, either absolute or relative to sales?

Not a financial number on the benefit over that. I think what you look at when we see the rollout program is benefits [ screw ] the more businesses we start putting on the new system. The interconnect between the factories and the sales entities is one of the things that will drive much better efficiency and reduce lead times, improve customer service. So a lot of the benefits come through in the elements that Kiet was referring to in customer value. They start to accrue as soon as you have 1 factory and 1 selling entity on the same system, and that builds all the way through that 3 to 4 years as we complete the program.

I would expect on that, just to add, as we put more entities on, we will get faster quote times as the entities talk to the other faster product lead times. So we're measuring it from a -- what the customer sees. And that's why we want to be adding to that customer experience.

Okay. And then lastly, on acquisitions, good to see something coming in after the period end. Is that indicative of a pipeline that's starting to move a little bit faster? Or has that been a sort of a slow burn on that particular deal?

I mean, first of all, we're really excited about the Hanbay acquisition. Whilst small, the product technology is what we're really excited about, and it adds to our technology platform. So with the megatrends of electrification, we're seeing good opportunities where there was a market for pneumatic products, especially in the compact small valve areas, moving more towards electric actuation. So for example, hydrogen is a key market, that acquisition allows us to tackle these target segments. And there's not that many of these products around at the moment because the majority of the market is pneumatic. So it's really us getting into that field early in establishing ourselves. That gives you an indicative idea of what is already in our pipeline. And this is one of the number of opportunities in the pipeline that we -- we've converted. And I think I mentioned in the past that we do have a pipeline. We see it more owner-managed type opportunities, and that's what we're looking to convert.

It's Jonathan Hurn from Barclays. Just a couple of questions, please. Just firstly, just can you talk a little bit about the order book. So -- just in terms of the mix and how that's sort of playing out this year relative to last year. So if we look year-on-year, is there more hydraulic this year versus last year essentially? Or is it more electric? Do you want to talk to that?

I think if we look at this point in the year compared with this time last year, then there probably is more pneumatics and hydraulics partly because -- if we think about the supply chain challenges in the first half of last year, they were largely focused on electric actuation and some instrumentation that was reliant on semiconductors. What we've seen through the second half and then the first half of this year is really some of the resolution of those supply chain issues and therefore, a big increase in electric actuator sales. So I think it would be true to say there's less electric actuation and instrumentation in the order book than this point last year, yes.

And in terms of the visibility of that order book, it's all your revenue covered pretty much for the second half of this year? Or do you need some...

The order book as usual has some elements in it that will go out into next year. So there's some elements in the order book that will certainly go into 2024 even as we sit here at the end of June. I think the other thing -- sorry, going back to your first question. The other thing that causes relevant to that is the uptick in Oil & Gas naturally brings with it an increasing fluid system, fluid power products within as well. As traditionally, that's the 3 of our end markets that's had the greatest fluid power content within it.

And the second question is just in that investment in Growth+. If we kind of look at the run rates of that, is that going to increase going forward in terms of what we see investment '24 versus '23? Just sort of roughly for those?

I think we'll balance the investment with the growth. We've said we will deliver progressive margins, and we will continue to do that, but we also need to invest in Growth+ to keep that momentum going. I think we're seeing that momentum come through. And so we'll -- that will be a balanced investment. So I wouldn't say right now that it's going to accelerate or not, it will just be based on the performance of the company going forward.

Andrew Douglas from Jefferies. The obligatory 3 questions, please. Just following up on the M&A question. You've got a pipeline of owner managed business, which always takes time because they don't inherently want to sell. How seriously was the share buyback discussed at the Board? And is there any reason that you guys need to be in net cash for the next 2 to 3 years? Is that a specific policy decision? Or why can't you gear up to 1, 1.5x like others in the sector?

Yes. I mean we reiterated our capital allocation policy in the Capital Markets Day in November, and that was investment in organic growth, which we've talked about, we're doing a progressive dividend. Then M&A and then share buyback. You've seen that all 3 have happened so far in the first half. And so we always review the possibility of a share buyback at this point in time, we concluded that it wasn't the right thing for us to do at this time based on our capital allocation policy.

Okay. Then you've got surplus cash and you're investing and you're acquiring and you're progressing the dividend, you still don't think it's appropriate?

Not at this time. I guess that's a -- and the GBP 20 million pension contribution was the other unusual feature in the first half. But it's something we constantly do review. It is a board discussion.

Just going back to Slide 19 on the Oil & Gas upstream. You say that IQTF is established as a leading -- that was your target segment in action in the year. What exactly does that mean? Does that mean you're now specced into every single opportunity going forward? You've just got a better product offering. People now understand who you are, what you do. What exactly does that mean in...

Yes. So we have our large share in terms of that application. I wouldn't say we're specced into every single opportunity, otherwise would be totally dominant. But we have what we believe over half of that market share in that field. We are a preferred supplier of some of the top OEMs in that field. So we are well placed in terms of delivering that. And you can see on some of the graphs on the regions, the growth in North America and the growth in Oil & Gas, you can see that, that methane emissions initiative coming through.

Super. And then last thing, just any update on the competitive landscape, how you guys think you're doing kind of relative whether other competitors change in their business models or routes to market or product offering? Anything that you can just give us for kind of any changes out there because...

I think it's been quite consistent in the first half. We've not seen any major movements. We've grown orders low double digits. I think that's been a really good performance. Like I said, we've made traction in our methane emissions reduction which you could say for us is a new market. I know it's not a new market, but moving into the electrification technology, that is new for us. We've strengthened our already strong position in LNG. So I think desalination we've won a number of projects. So the target segments are really working, and we are growing the business. I think in terms of market share, it's quite hard because we're defining new markets for us to enter into as well.

But your large peers aren't doing anything different.

No, large peers aren't doing anything different.

Mark Davies Jones from Stifel. If I can just get back to that methane abatement issue. Is that the highest growth of the target segments at the moment? And are you flagging a broadening of the opportunity there as that becomes an increased focus? Or is that going to be very specifically located in the U.S. given the [ peculiarities ] in that market?

Yes. Off the top of my head, I couldn't tell you whether that was the highest growth or not, but it is good, right? The methane emissions reduction is largely concentrated to North America just because of the way that the geography works and it has the highest number of wellheads. So I think in our Capital Markets Day, we said there was about 1 million wellheads in North America, whereas if you look at Middle East, there was about 18,000. So the concentration of oil in the Middle East is a lot deeper and more concentrated, where in North America, there's a thinner layer as it were, and you need to have more wells to drill for the oil. However, that said, there is also midstream opportunities for methane as you go along the pipeline. Our products are used in midstream along the pipeline. And there's also opportunities in Australia that we've won as well. But the majority is in North America.

And then a broader one, if I may. The upturn in CapEx across the Oil & Gas, well is obviously an important driver. Do you have any views on whether that's a brief period of catch-up spend or whether we're at the beginning of a more sustained cycle?

I mean from all of the reports that we've read, going out, we believe that it's more a sustained cycle as a catch-up on investment. We know that hydrocarbons will still play a major role going forward. So we believe that will be for a more sustained period through the reports that we've been looking at.

George Featherstone for Bank of America. First question would just be on the H2 outlook for book-to-bill. Obviously, you talked to strong demand across your segments, but at the same time, you're delivering a very good backlog. Historically, you've done less than 1x in H2. Just wondered if the pipeline is strong enough that you could do over 1x in H3.

So I would say we expect to do over one time over the course of the whole year. So if you look year-to-year, expect us to be above one. However, just purely due to the weighting of revenue in H2, I don't expect that to be above one. However, that doesn't mean that we won't have good continued orders, it just means that the delivery of the revenue in H2 is going to be higher.

Okay. And then on LNG, the outlook is obviously very strong. I wonder if you could just share with us what your mix is on orders currently? And then what the roadmap of that could be in terms of how it could change over time?

Yes. Off the top of my head, I don't know what the specific mix of the LNG is in our order book.

No. No. And are you meaning that all sort of products within...

Sorry, just absolute size of it in terms of relative to the overall Oil & Gas piece.

Okay. No, I don't think I have a bit of size on that one. I am afraid.

Okay. No worries. And then final one would be on -- for you, Jonathan, drop-through expectations. Supply chains are easing volume growth, obviously very strong, cost pressures easing. What should we expect for drop-through of that volume growth in the second half?

I suppose the easy way to answer that one is to refer you to the outlook statement, that says expectations unchanged for the full year, and that will be -- that will generate the drop-through answer.

Aurelio Tejedor from Morgan Stanley. Two questions, a bit of a further question, the first one. As you enter the target segments or as you grow more in the target segments, are you seeing increasing competition? Or are you bumping up against other competitors that you would not traditionally pump against that? And if that's the case, how do you think pricing dynamics are in those segments related to the more traditional, let's call it, not target plus segments?

Yes. I think as we enter our new target segments, we absolutely see different competition. We are obviously different divisions of the big players or smaller, smaller player competition. So for example, in the methane emissions reduction, we're going against pneumatic control valve type technology. But then in LNG, for example, that's the traditional competition of Emerson and Flowserve that we will see. So it's very different for different market. The key for us entering these markets and winning is having a really good value proposition. So we're not entering on price. We're actually picking target segments that are critical to application where cost of failure is high, that's where Rotork really adds advantage. And where price, therefore, is not a main factor. Our sales force are extremely skilled at selling the right products in the right application to deliver what's needed for our customers, and that's how we would do that.

Some of the markets we talked about in Capital Markets Day like HVAC applications and chip manufacturer, we're not selling against competition. We're selling into an application that wasn't previously automated.

That's great. And the second question is picking up on one of Jonathan's comments on pricing, but you don't expect to do additional price hike or price ratios in the second half. Is that because you think there's more pressure in the market, i.e., the market leisures have bit of price increases? Or is that because you don't need to do that because you already have the cost base where it needs to be for the full year, therefore, you need more price?

Yes. It's a little bit both. The pricing that we put reflects the cost base that we have coming in, in terms of materials and labor and our overhead. Over the last few years, we've seen material cost increase quite significantly, especially in the chipsets. So we put through the pricing increases to offset those increased costs. This year, we're seeing costs in material stabilize, but then what we're seeing is a higher cost in labor. And that's where our pricing has covered. So hypothetically, if we saw a big increase, let's say, in materials, again, we would put through that pricing. So the pricing is aligned in terms of maintaining our margins or covering the increased cost that we see through our supply base or through our labor base.

And obviously, we had visibility at much the same time of what we anticipated labor cost increases to be on first of Jan as we were implementing the price increases on first of Jan. So that's what it was based on at the start of the year.

It's Lush Mahendrarajah from JPMorgan. A couple of questions. Firstly, on Hanbay, I know it's a small deal, but can we get an idea of sort of how fast that business has been growing over the last few years? Just has it been a slow burn in terms of converting those smaller markets. And there's a big opportunity ahead or just sort of just how easy, I guess, that transition is going to be for you guys are going to have to do more of the pushing on that?

Yes, that's a really good question. I mean, like I said, we're really excited by it. It's relatively a small business at the moment. However, it completely fits into our sweet spot. And so we will literally plug that product into our sales force, and they know how to sell actuation solutions on valves. So we have got really high hopes for that product range. We understand our target segments. We understand where the product is needed. We'll obviously look as we go forward to develop new markets for that. But that product will just plug straight into our sales force. There's not that much we need to do in terms of training or defining synergies.

Okay. And then second question is on RSS. Perhaps a bit unfair because the sort of the rest of the business is growing really quickly already. But I guess, you sort of surprised it's not a bigger proportion of revenue or so is that sort of growth trajectory in line with sort of expectations.

See RSS has grown in line with the group overall. So it was 19% of group revenues 19% last year. So it's absolutely grown in line with the group. And it's a key leverage for us in terms of growing our business. We've, of course, got to win the projects and then we get the aftermarket. So as you win more projects, you've got to win more aftermarket. So it's -- there's a balance in that way. But we're pleased with the growth of RSS. And you can see the technology that we're looking to deploy with IQ3 Pro, the smart app, the Intelligent Asset Management. So it's an area where we are looking to focus to grow the business. But that said, the RSS portion is ingrained in all 3 of the divisions.

Just a quick one on China in CPI. You said that the recovery has been delayed, which no surprise. Is that being laid into the second half into '24? And do you think that the scope for recovery is still kind of what you thought it was 6 months ago. It's truly been delayed? Or do you think that the shape and maybe trajectory is just not what could have been?

Yes. I think the scope is what we would expect, and it's a shift and it's a delay. So I mean we have seen shoots come through. We have seen some increase, say, Water & Power, for example, was hit relatively hard in H2 last year in terms of China. That's come back on stream. We've had good growth in Water & Power. So at the moment, it's specific to specific projects as government stimulus kicks in, but we are seeing it come back. I think it would be delayed into Q3, Q4 is a current thinking.

It's Harry Philips of Peel Hunt. Just sort of several detailed type questions. I think you gave a number, Jonathan, for the sort of impact of the pay increases coming through at the beginning of January rather than the spring. And sorry, I've just missed the numbers. So some help there would be appreciated.

We talked about that being something in the region of a 50 to 60 basis point headwind in the first half. I don't think that was necessarily in what we said, but that's roughly what the impact was.

The second is just in terms of sort of you had -- obviously, with the receivables, working capital sort of performed very well. When does it, I suppose, horrible word normalize?

Well, arguably, elements of it were far more normal. So if we split it into the 2 elements. From a receivables perspective, arguably, last year, December '22 was relatively normal. I think we always have a weighting of revenue into November, December, which is -- which largely is going to drive the year-end position. So that possibly is broadly normal, but obviously, we're expecting growth in headline revenue number. Therefore, receivables will suck in more money through this year, even if it remains the same day sales outstanding. From an inventory perspective, we are still carrying some level of inventory to protect against the supply chain issues. So that certainly hasn't normalized yet. And I think we'll continue to reduce through this year, but probably not back down to absolute normality if there is such a thing, by the end of this year. And things like the achieving customer excellence program that we talked about in March are new ways of managing the products and the inventory in respect of certain products which will also, in time, more focused on reducing lead times, but does have an impact on inventory and will reduce some of the inventory through those programs as well as we deploy those.

And then just finally, just noticing in the detail that the sort of CapEx net off in terms of some small disposals and things, are they sort of pretty much done? And then I suppose part of that also just the business sort of development costs, GBP 12 million for the year. And again, I should know this, is that just a '23 or is that a rolling program we should expect? And then I suppose the drop-through you might get subsequent to that.

Okay. It's a few bits there. In terms of the GBP 12 million, that's the business transformation costs that are now coming through below the line in terms of P&L. Those are largely around the business transformation program, which continues out over the next 3 to 4 years. In terms of the disposals of properties, that really is the tail end of the rationalization pieces from the GAP program, the previous program, which is why those are still coming through below the line as well.

It's Bruno Gjani from BNP Paribas Exane. Could you comment a little bit more on larger orders? And I guess, what the funnel for these larger orders looks like today?

Yes. I think -- I mean, on the top level, these larger orders are from the Oil & Gas higher CapEx spend infrastructure build on new, let's say, Middle East, for example, on new capacity, rigs or products. In Water & Power, for example, their big desalination projects as well. So their big CapEx spend linked to infrastructure builds in mainly Oil & Gas and in Water & Power.

I think interesting in the first half, we've seen some in all 3 divisions -- because as well as your desal example in Water & Power, there's also one of the power station refurbishment projects as well in terms of orders. And then in CPI, we've had mining projects, which are also more lumpy than the normal CPI activity. So it's been quite broad.

Understood. And just on lead times, could you talk about how lead terms have developed for your business, what they look like today relative to, say, 6 or 12 months ago? And then with that in mind, how should we think about the backlog today in terms of length of it in month's worth of revenue coverage, say? And how would you expect it to normalize going forward, if indeed you do?

If I talk about lead times relative to their normality within the different product ranges. So lead times for fluid system products and for gears have gone back to what they were, let's say, pre-COVID pandemic. Gears, in fact, has gone down from 16 weeks to 2 weeks with our special ACE program as what we've said. So anything mechanical without a chip at the moment, I would say, has gone back down to normal lead time elements. So that's a lot of fluid power and gears. Instrumentation, again, has gone back down to similar normal lead times and lead times in instrumentation type products are between 2 to 4 weeks. What also has come down is our electric actuated lead times, but they've not come back down to normal, mainly because they have the electronic chips and circuit boards in there. And part of the issues we're experiencing this time last year, we were experiencing availability of chips. So we couldn't buy the chips and we had to put resources in to source them direct. And then we had to reengineer our boards. This year, those issues have largely gone away, but the kind of bottleneck has now moved downstream into the PCBA manufacturers. So as chips are more available, more orders have gone into those PCBA suppliers from all different industries. And their order books have ballooned and therefore, their lead times have gone out. And then that has a knock-on effect to us for our electric actuators. So whilst they've reduced, they've not got back down to normal. What I would say is, we're not the only ones experiencing it. Our competition are also experiencing it. And we know that in the past, they've experienced worse than us, and they've not kind of caught that back up yet. So it's a thing that is within the industry, and I don't think we would have been able to grow the orders in which we had, had we been the outlier in terms of our lead times. So I would say they've improved, they're not normalized, but they're still ahead of the competition.

And I guess related to that, with your business transformation program, you expect lead times to improve further. What would that mean for your lead times relative to, say, where the competition stands today? And I guess historical levels?

Yes. I mean we're trying to drive lead time as being world-class as well. So we implemented what we call the [ ACE program. ] We piloted that with our Gears product. We've got our Gears products from 16 weeks to 2 weeks. I mean, that is now ahead of all of the competition. We need to do the same with our fluid power lead times. But inherently, the projects are long anyway. So we're not the last -- the longest lead times, that has less of a competitive advantage. Our instrumentation product lead times are pretty up there with being the best, if not up there, we're being equal to everyone else. And then our electric actuator again, is up there would be the best, if not equal. But if we can get that lower a couple of weeks lower than the competition, then that would really give us a good competitive position. So we're just trying to be better than the competition.

Got it. And just coming back to methane, could you help me understand. So the way I was thinking about it, I was looking at the upstream business and the performance in H1, and the growth on an organic basis looks like close to 40%. Would it be fair to assume that growth above, say, the divisional average can be attributed to that methane opportunity? Or I guess, how much has that had an impact? Or what's the -- would that be a fair way to think about it?

Well, I think don't think that all of the upstream growth in H1 is down to methane because we've also talked about strong Middle East spend in upstream there as well. So there's an element of both of those in the H1.

Okay. Got it. And just finally, just on the adjusted operating profit [indiscernible] because in H1, I thought it was very interesting. So a strong contribution from volume net price, managed direct costs well, the drag from investments, of course. And I would assume that you have better visibility on how this line item or bridging item develops for H2. Could you perhaps provide some color in regards to how we should be thinking about just this specific bridging component for H2 or the full year?

I think it comes back to the point in terms of balancing. So this balancing of investment and the pace of investment as we see growth coming through. You're right, we clearly have more visibility over H2, as a result of the order book going into it, and we're already, I guess, understanding that the investment areas that we're focused on in the very short term. I think I'll come back to it again. That brings us to what we said in terms of the outlook statement pretty much in terms of we're managing the margins to those levels and the outcome to that.

I just had a question on Water & Power. Just in terms of those sort of power refer orders. Obviously, you're talking about the outlook for that is pretty good, I think you just said that there's a big order or power refurb order in the order book to come through. I think last time we had that situation was back in sort of 2020 when the margins of Power & Water got close to 30%. Can we see a similar scenario? Is that rolling out again as these things start to come through from the order book into the division?

Yes. I would just point that with look, what we're trying to do is really grow the base business. which we talk about the OpEx part of it, the big one-offs come in as kind of cherry on the cake. So they're not continuous. So whilst they carry high margins, it might be a spike in terms of those. But what we want to be able to do is improve the underlying margins of the business altogether. And I think that is something we'll strive to do in terms of hitting our mid-20s operating margins. So you'll see naturally Water & Power increase as we deliver our mid-20s margin. But I wouldn't put the lumpy stuff on top of that because it -- from period to period, it does distort.

Dom Convey from Numis. Just a follow-up, if I may, in terms of the price volume mix by division. And I think Water & Power you said that volume was more significant component of that sales increase. So -- but into that presumably pricing less whereas I come into this year thinking that as CPI had actually been better on capturing price increases through last year, that would have naturally been a lower price impact this year than the other 2 divisions?

I think you're right. The dynamic is partly around, again, back to the product mix within divisions and therefore, the speed with which those price increases come through. So CPI, more instruments, shorter lead times on the instruments products, price increases from last year would have come through quicker last year. Therefore, less of last year's price increase carrying forward but you've got more of the first of Jan '23 price increase already impacting CPI. So it's quite a dynamic model.

Yes. Okay. And just following up, if I may, around the methane reduction clearly growing rapidly, expected to, I presume, continue to outpace the core Oil & Gas business. Is there anything mix related we should be aware of there in terms of that growth? Or does it actually just come through on a similar drop-through as the core base?

So methane is all electric actuator, which is our highest margin product. So as that comes through, we should expect a positive mix in terms of having a higher percentage of electric actuation. And that's the same for all of our kind, what not all, but the majority of our segments are designed to improve our mix as it will. Any other questions? No? So thank you very much for your time today. It's great to see you all.