Rotork plc (ROR) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us as we discuss our 2024 first half results. Alongside me is Ben Peacock, our CFO. I'll start today's presentation with my highlights of the period. We delivered a strong start to 2024, building on the excellent momentum established in the second half of last year, and I'd like to thank all our staff for their hard work in the first half. Group sales grew 11.6% on an OCC basis, with oil and gas and water and power sales, 20% higher year-on-year. CPI sales were lower, largely due to the result of non-repeat mining projects. Overall, I'm pleased with our target segment approach, which delivered sales growth above the group level. RSS contributed 22% to group revenues and again grew faster than the group overall. Operating margins increased almost 200 basis points to above 21%, returning to the levels typically seen in the first half pre-COVID. The increase in margin reflected the higher sales and good operating leverage and was achieved whilst making Growth+ related investments. Return on capital employed rose year-on-year and was close to 37%, demonstrating the value creation potential of the business. Cash conversion in the period was good, leaving net cash at GBP 119 million, a little lower than at the end of December despite having spent nearly GBP 20 million buying back shares. Safety remains a top priority at Rotork, and we once again delivered a year-on-year improvement in our total recordable incident rate. We launched our Growth+ strategy 2 years ago, designed to deliver our ambition of mid- to high-single-digit revenue growth and mid-20s operating margins over time. We are now seeing its impact both in terms of accelerating sales and in delivering higher margins. The next couple of slides highlight some of our target segments and some of the innovations we have made recently to deliver our ambition. The target segment approach is a key pillar of our growth plus strategy and has already served to reignite revenue growth at Rotork. Target segments are markets we have identified which offer significant profitable growth opportunities. Our divisional teams with a commercial and business development approach are responsible for selecting their target segment and executing growth within them. We encourage our teams to be agile and to continually seek and develop new target segments to build on our growth momentum. This slide shows our estimates of the market size of the Target segments within each division, together with our estimates of the market growth rate. Overall, target segment sales represent around half of the group currently, and we estimate the combined market growth at high single digits, giving us the platform to deliver our revenue ambition. Examples of our Target segments include the electrification of upstream and midstream within oil and gas. Critical HVAC control for technology sectors within CPI and the automation of water infrastructure globally within Water & Power. I'll now highlight some of these examples in action over the next few slides. The first Target segment I'd like to highlight is the electrification of upstream and midstream. The oil and gas industry is committed to halving its Scope 1 and 2 greenhouse gas emissions intensity by 2030 with one of the key levers being electrifying upstream and midstream processes. The IEA calculates that oil and gas electrification is one of the lowest-cost ways to reduce global greenhouse gas emissions of any activity in any sector, hence, representing a great opportunity for Rotork. The momentum in electrification is building. We are now seeing this in areas outside of North American upstream, including into midstream pipelines and other geographies. Having already had good success within wellhead chokes in North America, we are now gaining traction in other upstream process stages and have won the first orders for electric actuators used in well completion. A new and emerging target area we highlighted at this year's prelims. We are also seeing strong momentum in pipeline electrification with a significant pickup in orders and inquiries in both Asia Pacific as well as in North America. As I've mentioned, the increase in activities within this target segment is not just in North America. We're seeing it in various parts of the world with business wins in Europe and Australia and across a broad range of Rotork electric and hydroelectric actuators expanding from the original success of our IQTF product. In summary, we're very excited about the electrification potential of our Oil & Gas division. The emerging new segments in upstream, midstream as well as the expansion into other geographies, provides Rotork with further structural growth opportunities in addition to the already identified potential within upstream wellhead and production processes. Putting the opportunity into perspective, our upstream and midstream electrification sales grew strongly in the period and represent around 8% of group sales. Innovation, the third pillar of our Growth+ strategy is at the heart of what we do and plays a key role in supporting our customers in their emissions reduction journey. Traditionally, oil and gas customers have used fluid power actuators for emergency shutdown applications on wellheads and pipelines due to the fast closing and high torques required that an electric actuator cannot deliver. However, these products vent gas when operated. To solve the problem of delivering the required shutoff speeds at high torque, whilst eliminating the need to vent process gas. We've engineered a modular electrohydraulic actuator range, combining the simplicity of electric operation with the speed and high torque of hydraulics, essentially the best of both worlds. The product can also be used in applications requiring high safety certifications and very importantly, can be retrofitted onto existing fluid power actuators. The electrohydraulic range is an exciting addition to our product portfolio with a strong competitive advantage for our customers looking to eliminate methane emissions from safety shutdown valves on wellhead and pipelines. The second target segment I'd like to feature is critical HVAC within CPI. CPI has delivered low double-digit sales growth since its inception in 2020 up to 2023. Whilst its sales slowed in the first half, largely due to non-repeat of mining projects, we remain confident that CPI will deliver good levels of revenue growth over time. Our growth driver within CPI is critical HVAC with revenues growing in line with the group in the first half. Critical HVAC covers a number of niche critical process automation segment, which we believe offer the potential for exciting growth. These are structurally growing markets where we have a compelling product offering and in many cases, the opportunity to gain share. Examples of critical HVAC markets include tunnel ventilation, battery storage, data centers and renewables, for example, in the solar panel manufacturing processes. Rotork products have important applications in air quality and precision motion control as well as in cooling. Our products are typically used in critical applications where certified explosion-proof products is required. The third target segment I'd like to highlight is water and wastewater. Fresh water is a critical commodity and a scarce resource, and demand for it is growing, driven by mega trends such as population growth and urbanization. Additionally, the water industry is facing a number of challenges, necessitating increased investment, for example, to improve water quality, reduce leakage and adapt to climate change. Rotork products and services are used widely by the water industry to help automate processes, including in infrastructure, wastewater treatment and in desalination. We are firmly of the view that our competitive position in water has been strengthened in recent years through our strategic initiatives. We've seen new business in certain geographical markets and product segments where we have previously been less present. We've benefited from our sales force realignment, improving our lead times, new product launches, which I'll touch on in a moment and leveraging our site service capabilities. Our Water segment sales have grown close to 10% over the last 3 years, and we remain confident of continued growth in the future. One product family I'd like to highlight is the Rotork Battery Backup actuator or BBU. The BBU was launched a couple of years ago and has proved very successful across a broad range of applications, including in water markets as well as in oil and gas. The BBU opens up automation opportunities for electric actuators. Its unique selling point is that it's an electric actuator that can continue to operate even if power fails, allowing the user to move the valve it controls to a safe position. The BBU is simple to install and operate and 0 emissions when powered by renewable energy. It can be used in new installations or to replace existing manual controllers. As I've mentioned, we've seen strong demand for the BBU from the water industry, for example, automating outlet valves on water treatment plants. We've also seen excellent take-up of the product from the upstream oil and gas segment for wellhead safety shutoff applications as well as seeing new energy applications for carbon capture products and offshore wind platforms. Overall, a fantastic product, creating new valve automation opportunities within multiple markets. That completes my first section, and I'll now pass over to Ben, who will take you through the financials before coming back to discuss the outlook.

Thank you, Kiet, and good morning, everyone. Before I go through the numbers, I would just like to take the opportunity to say how delighted I am to join Rotork as CFO. It's a privilege to join the company with such an excellent financial profile, great products and market-leading positions, strong culture and supported by a great team. I'd also like to take the opportunity to acknowledge the great work of my predecessor, Jonathan, who has laid strong foundations across the finance function for me to build on. I would also like to thank Jonathan for his support during my transition to Rotork. If we now turn to the numbers, orders received were marginally up on prior year on an organic constant currency or OCC basis, despite the prior period, including an unusual number of large orders. Additionally, orders were 4% up versus revenue. Oil & Gas and Water & Power orders were slightly higher, while CPI orders were slightly lower. Revenue at GBP 361 million is 8% higher than prior year on a reported basis and just under 12% ahead on an OCC basis, with Oil & Gas and Water & Power revenue well ahead and CPI modestly lower. Currency was a headwind and decreased revenue by GBP 14 million. Rotork Site Services performed well, with revenue once again growing faster than the group. And its contribution to group revenue in the first half has increased to 22%. Adjusted operating profit of GBP 76 million is 17.1% higher versus prior year, and margins were up 170 basis points at 21.2%. The Return on capital employed rose over 4% to 36.9%, reflecting the increase in operating profit, whilst adjusted earnings per share at 6.9p is an 18% increase on H1 2023. Cash conversion was 106%, and we closed the period with net cash of GBP 119 million. The share buyback commenced in the period and by the 30th of June, shares with a value of GBP 18 million had been purchased and canceled. Finally, reflecting our confidence in the outlook, the interim dividend at 2.75p is 7.8% higher than the prior period. If we now turn to the divisions and starting with Oil & Gas. Revenue grew 20% OCC, driven by the EMEA and APAC regions. We saw growth across all sectors with downstream growth particularly strong. Within Target segments, we made good progress in Oil & Gas upstream and midstream electrification with especially encouraging progress in the midstream. Downstream sales now represent 53% of the total, upstream 24% and midstream 23%. Adjusted operating profit of GBP 39 million is 29% up on an OCC basis. With strong volume growth, operating margins increased 140 basis points to 22.8%. If we now move to CPI, revenues were 6% lower year-on-year on an OCC basis. The decline followed 3 years of strong growth and was largely the result of reduced mining project activity. Within target segments, we saw solid growth in Chemicals and Critical HVAC. By region, EMEA sales grew mid-teens with all subregions higher and the Middle East and Africa performing particularly well. Asia Pacific sales were modestly lower despite good growth in India, whilst America sales were lower due to reduced deliveries to mining customers. Adjusted operating profit at GBP 24 million is 3% lower than prior year. Despite the lower profit, adjusted operating margins rose 80 basis points to 23.5%. The higher margins reflected positive price mix and good control of costs. If we now turn to Water and Power. Revenue in the first half was ahead of 20%, with both Water and Power sectors growing at similar rates. The target segments of water infrastructure and desalination grew strongly. EMEA was Water and Power's fastest-growing region in the period, whilst APAC sales were ahead mid-teens, with a Water for all initiatives driving very strong revenue growth in India. America sales also grew solidly with Latin America particularly strong. Adjusted operating profit at GBP 24 million is over 50% higher year-on-year on an OCC basis. The increase in volumes, changes in product mix, labor productivity and improved materials pricing have resulted in adjusted operating margins increasing 510 basis points to 26.9%. These margins are commensurate with the margins achieved in Water and Power, pre supply chain challenges. If I now move to the profit bridge, volume, price and mix have contributed to increased profits in the period with higher volumes, the greatest contributor. Price increases have returned to more normal levels. And together with a favorable shift in product mix, have more than offset the increase in people costs. We have seen strong operating leverage on the higher volumes, which has led to increased margins with adjusted operating margin 170 basis points higher at 21.2% in the period. If we move to cash, we started the year with net cash of GBP 134 million, which reduced to GBP 119 million over the period. Working capital was a small inflow in the period, even with the strong growth in revenue. Net working capital as a percentage of sales reduced from 27.3% in December to 26.4%. Other items include further investment in our business transformation program and employee benefits were higher year-on-year due to increased bonus payments. The strong cash generation has funded GBP 58 million of returns to shareholders through to GBP 40 million 2023 final dividend and the GBP 18 million share buyback. Our capital allocation policy is unchanged. Our priorities are organic investment, progressive dividend, M&A and returns of capital in that order. If I now move to the items below operating profit in the income statement. Similar to last year, the majority of these items relate to investment in our business transformation program, a further GBP 7.6 million was incurred in the period, implementing the new ERP system and the associated systems and processes. The European rollout continues with implementation progressing on track at several plants. Finally, we incurred some costs relating to the relocation of our China manufacturing facility. If I move to tax, tax rates have moved slightly higher this year. The headline effective rates and adjusted effective rate have both increased 80 basis points to 25.3%. Higher U.K. tax rates were the largest driver of this increase. If I now turn to the full year guidance, we anticipate FX to be around a 4% headwind. CapEx is expected to be around GBP 15 million. And the investment in business transformation and ERP is expected to be GBP 20 million and the China relocation is estimated to cost GBP 5 million, with both of these investments being expensed below adjusted operating profit. In summary, the outlook for our end markets remains positive, with good order intake in June and July. Our order book provides good revenue visibility into H2 and undergrowth plus, we expect 2024 to be another year of progress. I will now hand you back to Gig...

Turning now to the market outlook, starting with Oil & Gas. It is increasingly clear that hydrocarbons will have an important role in the world's energy mix for years to come. The industry continues to invest to drive productivity, provide energy security as well as electrify operations to reduce greenhouse gas emissions. The electrification of upstream and midstream operations has become an increasing priority, and we have seen a clear step-up in pipeline electrification, the first activity in well completion as well as adoption in regions outside of North America. Within LNG, we continue to expect a pickup in activity over the next 12 to 18 months. We consider the outlook to be positive. And while still mindful of macro and geopolitical uncertainties, we expect further growth in oil and gas sector activity. Moving to CPI. We consider the critical HVAC market to have a positive outlook driven by structurally growing markets such as tunnel ventilation and data centers. Whilst the bulk chemicals market has been sluggish, CPI has increasingly focused on specialty chemicals, such as green ammonia and methanol where the outlook is more positive. We continue to believe that CPI has plenty of opportunities to win share in its target segment and also in particular in markets where it has historically been underrepresented. As a reminder, the division faces easier comparisons in the second half. And last, by no means least, Water and Power. The global water sector is firmly in investment mode, building new and modernizing existing infrastructure as well as managing climate-related changes and potable water shortages. Efficiency and digitalization remain key focus areas. The Power segment within Water and Power experienced increased activity in 2023, which carried on during the start of 2024. Looking forward, we see good prospects for emissions-related spend, including carbon capture and storage and for renewables, such as offshore wind platforms. The outlook for the traditional power market is more positive than it has been for some time. This improved outlook is driven by the energy security, electrification and general economic growth. In 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 product and service offering. We have a great opportunity to create value for all stakeholders. We have a major role to play in the transition to a low-carbon economy as well as helping preserve natural resources such as fresh water and eliminating energy sector methane emissions. The benefits of the Growth+ strategy are increasingly apparent, enabling us to deliver double-digit OCC revenue, profit and EPS growth. We have also delivered strong first half margins and finished the period with net cash of GBP 119 million, giving us the capacity for further bolt-on acquisitions and to continue our share buyback. To finish, the outlook for our end markets remains positive. Order intake was encouraging in June and July, and our order book gives us good visibility. Our full year expectations are unchanged, and we continue to anticipate 2024 to be another year of progress on an OCC basis. Thank you again for your interest in Rotork. We'll now open the lines for your questions.

[Operator Instructions]. Our first question is from Andrew Douglas.

I hope you can hear me. I've got a couple of questions [indiscernible] nice and quick. For Ben, could you just talk about working capital, working capital as a percentage of sales going down is good despite the strong growth. And I think we're now at 26.4%. What is the right number for Rotork on a midterm basis? And you're not [indiscernible] under the desk, you're in control now. What have you found in side Rotork's finance function, what needed to improve and kind of where to focus? And then for Kiet, can you just talk us through the large order outlook, I know we had no large real orders in the first half, just kind of -- is that due to come back. And on the well completion, can you just talk about what it was that actually got the customer kind of over the line? And once one customer is now on board, do we see the competitors kind of having to get involved in that kind of losing market share on the ESG perspective or whatever you can share with us.

Okay. Thanks, Andy. Really good to see you. I hope you're well. I think I'll hand over to Ben to answer your first question.

Yes. Thanks, Andy. So on the working capital point, we do have a small inflow in the period. As you'll have seen as an outflow in terms of inventory, but we had better receivables and payables. I think, look, could we see an improvement in inventory going forward? I think, yes, that's a focus for me going forward. In terms of giving you an absolute number in terms of working capital, where it could actually get to, I think in terms of -- give me a bit more time, I think I can come back to you on that, particularly I think as we go through the business transformation program. On the second point, just in terms of the finance function, what we found. I mean, as you know, Jonathan was in the seat for 14 years, did an extremely great job of building the finance function up I think it's a broader point in Rotork, which is systems and processes, how we can simplify how we do business with ourselves, how we can simplify how we do business with our customers. Again, I think as you go through the business transformation program, a lot of that will be taken care of. So I think a lot of great work in terms of foundation, as Jonathan has left behind. But again, for me, it's really about how do we support Kiet and the rest of the team to really capitalize on the growth plus opportunities.

Yes. Thanks, Ben. I think in terms of the large project orders, I think the way to look at it is in 2023, H1 2023, we had an unusually higher amount of large project orders, whereas in H1 '24, they've come back down to what I would call usual levels. So I wouldn't see it as them going away. I think this year is a more normalized number. Just in ratio, we had almost a 2:1 ratio between first half of last year and the first half of this year. And then in terms of well completion, we highlighted at the prelims. We're looking at other stages of the upstream process and one of them being the completion stage. There's a movement towards electrification in that space. So we've won a large order with a customer to fully electrify their whole eFrac platform. So these are typically in the past, hydraulic actuated -- actuators and valves. And this company has produced the first all-electric eFrac. So what that gives you is they've saved on all of the power required for hydraulics. They talk about easier or lower cost of ownership over time. So cheaper to run, easier to control and a reduction of actual infrastructure costs in terms of the build of the whole platform. So they actually save miles and miles of hosing, for example. So whilst the cost of the units in terms of the actuators are higher, they're saving overall in the total cost of the build for the platforms. So I hope that answers your question, Andy.

Our next question is from Lushanthan Mahendrarajah with JPMorgan.

I've got a couple of questions, if that's all right. The first is on orders. I mean is there a way to sort of quantify the excess orders last year from large projects? Are you trying to [ absorb ] the pressure of sort of the underlying order run rate [indiscernible] projects? And I guess as a follow-on from that, anything you can quantify what June and July were up from an order perspective. And then the second is on CPI, not the full year results, you guys gave us a sort of very helpful slide in sort of the end market breakdown you give us a bit of color around metals and mining and chemicals and critical HVAC, but would it be possible to get a bit more color on some of the other end markets as well and how they fared in the first half?

Yes. Thanks a lot Lush. It was quite hard to hear you. So I'll try and answer the questions. I think if you look at the orders in the first half of last year, as I said, we had an unusually high number of one-off orders and one-off orders of over 1 million. So the ratio was almost 2:1. But despite that into this year, we've seen orders marginally ahead. What we also saw last year was because of our longer lead times. So last year, we had longer lead times in terms of our component parts, our PCBAs. And because those were longer lead times, we had longer lead times on our products. What we saw was orders moving into the H1 for revenue due in the H2, so that customers could guarantee that they would get their deliveries as soon as they wanted them or when they wanted them. What we're seeing this year is lead times are going down. So for example, out of our Bath factory in IQ in the first half was around 16 weeks of last year. This year, it's around 6 weeks. So the lead times are a lot lower. So what we're seeing is a normalization of the orders and customers placing orders a bit later because of our lead times. So I think that's the dynamic in terms of the orders between H1 last year and H1 this year. In terms of CPI, I mean, CPI has grown circa 11% CAGR over the last 3 years. We think over the next 3 years, it will still be a strong contributor to Rotork's financial ambition. What we've seen this year is a pause, I would say, largely due to nickel mining projects that came through in the first half of last year. We didn't see any more projects into the second half of last year. So we see comparisons being easier as we go through. The other areas of CPI, as I've highlighted in the presentation, HVAC has grown in line with group revenue, so circa 12%. Chemicals has also grown to that degree as well. So underlyingly, we're very confident in CPI and the reduction this year were due to the one-off mining projects. Do you want to...

I'll just add to that, Lush. I think when we say mining it's specific to nickel. We've actually seen good growth in both copper and gold in Latin America and also [indiscernible] well.

Our next question is from Jonathan Hurn with Barclays.

Just a few questions for me, please. The first two are just on the electrification. So I don't know if it's possible just in terms of that 8% of sales from after midstream electrification in the first half, can you just give us a split between what was made and what was up? And then secondly, just in terms of that sort of, I suppose, midstream electrification opportunity, can you just sort of quantify, give us a little bit of color maybe in terms of the potential addressable market in terms of actuators that could be replaced there? Those are the two on electrification. And then thirdly, just in terms of the order book. A question there is just really just in terms of the mix of the order book. As we look to that H2 is that mix of that order book getting better, and we've got more electric actuators coming through. And ultimately, on the back of that, could we assume that the margin of that order book is improving?

Okay. Thanks, Jonathan. If I take the electrification question, I'll hand over to Ben to take on the order book question. I mean -- as you know, the electrification initiative for us in oil and gas has been a key driver for us and has been a key driver for growth within Oil & Gas. Initially, we targeted the upstream methane reduction because if you look at eliminating emissions where you would pareto first or where you would start first is at the wellhead to reduce the maximum amount of methane emissions reduction. That's where we're focused, and we've done well, and we've made really good traction at the wellhead. Since then, we've looked to develop further opportunities at the upstream stage. So I talked about winning our first project in terms of the completion stage. So that was really good and really positive. In parallel to all of that, we've already been seeing midstream opportunities to reduce methane. And that's because of the same technology used in upstream. So in midstream pipelines, the operators are using pneumatic-operated valves that use the process gas and now they're looking to replace those with electric actuators. It is actually quite a new market. So we haven't completed our deep dive market study. But in time, like we've done with the upstream, we'll share the sizing of the market, but it's very new at the moment. And so we're still in terms of scoping out the full market potential because that's not just concentrated to North America, we're actually seeing the midstream opportunities globally across all the regions, especially in Asia Pacific as well. So we'll come back to you in terms of the market sizing. In terms of the rough percentages, we haven't disclosed the upstream split and the midstream split. But in totality, it is 8% of our group revenues for both. Do you want to cover the Oil & Gas?

Yes, Jonathan. So just in terms of the mix, and again, I know you asked about the order book, but just what we're talking about mix, you'll have seen on the revenue side as well between H1 last year and H1 this year, there's a big shift in the mix, which obviously helped the margins. But as we actually go into H2 now, the mix in the order book is not that different to what we actually had coming into H1. Clearly, there's still some book and ship orders that we need to do in quarter 4, which may alter that. But at this point in time, there's not a big shift in the order book as we see it.

The next question is from Max Yates with Morgan Stanley.

Just my first question was on pricing. Could you just give us a feel of what your pricing did and sort of how you're expecting that to trend into the second half? And I guess my other sort of question is to do with pricing is we've seen some companies where they've started to put up prices earlier kind of ahead of their costs and then we've kind of had costs catching up. Are you sort of seeing your price rises as kind of commensurate with the cost increases? And are you confident on kind of keeping that gap between pricing cost as we go into sort of second half of '25?

Yes. Max, thanks. I'll hand over to Ben to answer that one.

Yes. So Max, just in terms of -- you recall maybe in 2022 and 2023 in terms of price, 2022 price was pretty much 2/3 price, 1/3 volume. In 2023 is 1/3 price, 2/3 volume. In the first half of this year, it's more like 20% of the increase in revenue is priced at about 2.5%. We're GBP 8 million as you look at the profit bridge. In terms of [ rose ] I mean, I think pricing just got back to a price increase is just getting back to normal levels. As you know, we do have pricing power. And where we see costs coming through there will be passed on to our customers to make sure that we cover that. But in terms of for the second half of the year, we're not anticipating any further price rises to go through.

Okay. That's helpful. And I guess if you look across the second question, if you look across your sort of end markets, and I appreciate in kind of each of the divisions those even kind of Southern markets within the divisions. I guess I'm just curious, when we think about the sort of organic growth going into '25 in terms of revenues, where do you see kind of the potential for which -- or which end markets do you see the potential for, I guess, slowing activity? And which of your end markets would you say kind of the ones where you've seen clear weakness kind of this year, or maybe last year and this year and where there's kind of most scope for recovery. I guess I'm just trying to gauge kind of what's accelerating or decelerating if we kind of -- or what's most clearly decelerating and accelerate if we break it down into your kind of southern markets?

Yes. Okay. Let me go through. I think as I said in the outlook, I think we're positive about our end market outlooks. I mean in Oil & Gas, we see a continuation of the momentum in our upstream and midstream electrification. We're making good traction there. LNG, we expect to come through next year. We're a bit later cycle. So we expect LNG to come through. This year, we saw a significant downstream improvement. That is a combination of growth -- this year has been quite a nice -- well, large growth due to some degree of catch-up in there. So we expect Oil & Gas to continue through into '25. I would say Water & Power very similar. Water has consistently grown. And you can see on the presentation, Water has grown roughly 9% CAGR over the last 3 years. We expect continued investment in the water market in terms of infrastructure to improve water quality or water distribution as well as desalination. So again, we expect positive momentum going into '25 with Water. The power markets for us and especially the traditional power market, they have been a drag to the Water & Power sector over the last few years. However, they returned in '23, and we expect them to be positive, well they are positive in '24. We expect that trend continuing due to energy security risks. So we expect that to continue into '25. So Water & Power, I would say, continued momentum overall in both Water and in Power. CPI, there's some elements in there. As I said, the HVAC element has continued to grow strongly through this year as well as Chemicals through our Target Segments approach. And I think our Growth+ strategy overall is delivering across all 3 of the end markets. Like we said, we think the mining in the world, specifically the nickel mining and projects have been pushed out. So we'll see where they go. So CPI should come into easier comps and then going into next year. We still expect that to be strong market over the medium to long term. So I think that's our view of the end markets. I would say, overall, a positive across the three.

Okay. That's helpful. And maybe just a very quick sort of final one. I think kind of on your site services, and you had, what looks like a very strong first half, above kind of average group growth rate. Could you just talk through -- was there anything in particular that your customers were doing, preparing their kind of facilities for higher activity or anything like that? Or is this really a function of kind of your internal initiatives? I guess, was there anything specifically from the customer side that calls for healthy growth rates? Or is this really kind of your initiatives [indiscernible]?

Yes, good question. I think yes, I think for us, it was generally our own initiatives internally. We've talked about RSS being a key growth driver for Rotork across all of the end markets. And we are trying to drive RSS sales ahead of the group revenues, and they're coming through. So we've introduced initiatives such as what we call our Lifetime Management. So we've introduced the intelligent Lifetime Management technology. We follow up with that driving additional service revenues. We look for better attachment in terms of when we're selling our products to try and sell the service with it. Obviously, that's a little bit different because we're selling to the valve makers. So what we try and do is go to the end users and sell the services to the end users. So through all of those initiatives, we're growing RSS, and that's on the back of the market outdrop. So the RSS growth is on the back of the Target segment's growth within all 3 of the divisions.

Our next question is from Andrew Simms with Berenberg.

It's Andrew Simms from Berenberg. Just a -- first question just on where is this coming from? You referenced the U.S. but what is the geographic split of that growth you're seeing? And I suppose in addition to that, what are the technologies? I'm guessing most of it is gas, but are there any signs of nuclear pickup in that part of the business also on the traditional power side. Any color there would be appreciated. I suppose partly related to that, on the margin in Water & Power, I interpreted your comments about margins going back to where they were previous to supply chain challenges is probably those margins being back to where they should be. But is there anything else in the mix, which could change that with Power, even for that quite a bit? Or is there anything from reversals in that margin going forward?

Thanks for your question. I'll cover the kind of power market, and then I'll hand over to the mix. I think in power, where we were strong traditionally is in the traditional fossil fuel market. We saw those markets decline '21, '22. And I think, however, since the conflict in Russia, Ukraine, we've seen an energy deficit. We've seen energy security risks. And therefore, what we've seen is a return of those traditional power markets come back on. What I would temper is actually within the Water & Power division, water has grown very strongly. So Water is about 2/3, Power is about 1/3 of the market. So that's traditional power coming back on stream. In addition to that, we are looking at new energies as well. So we've got projects in decarbonization, projects in terms of power, so waste and energy power projects, offshore wind farm projects, but they're relatively small, relatively nascent at the minute, but they're emerging target segments, which we're really looking at to really accelerate the growth once they take off. Then there types of markets where you have to be there at the beginning. You have to become specified with the end users, and that's what we're doing to take on kind of the energy deficits as we go forward in terms of new technologies within energy. Within nuclear, we play outside the containment, but there's not that much nuclear sales within our portfolio. In terms of the mix, I think I'll hand over to Ben to talk to you about the mix of...

Yes, Andrew. So -- and again, I'm glad you picked up on the point whereby the margins in Water & Power are really just commensurate with what we saw in '19, '20 and '21. I mean the margin was around between 26% and 28% during that period. And again, given the proportion of electric that is in Water & Power is probably disproportionately affected by the supply chain challenges, particularly on the PCBs. In terms of your question going forward, there's nothing really that we're seeing. If I look at the order book, that would see that mix really changing dramatically going forward into the second half of this year.

Yes. I think if I can add as well. I think in Water & Power, about 3/4 is electric in terms of the product range. So the way you look at the mix is not really water or power because we should really look at it from a product mix standpoint because we sell products at the same or very similar prices across all of the end markets. So it's really to do with the mix of the products within the division. We don't see much of a mix changes, as Ben said.

And then just a follow-up on that. You referenced in the statement that Water & Power grew at similar rates, which I'm assuming is around 20% of an OCC basis. So I suppose in the first half, what was driving that? Is it the traditional side? Or is it some of the more -- the newer energy side, I suppose?

It's the traditional side returning back on the power side.

Okay. Great. And then just a quick follow-up. You called out freight costs on the profit bridge. What are you seeing there? Is that getting worse? Could that create larger challenges just around supply chain and availability and things like that.

On the GBP 4 million on the freight cost on the bridge, Andrew?

Yes. [indiscernible] on that to be a challenge, but is it getting worse? Do you need [indiscernible]?

Look, I think if you look at just container rates year-over-year, regardless of which route you look at, whether it's from Shanghai to Los Angeles, or if Rotterdam into New York, freights year-over-year have gone up. So the GBP 4 million really, I look at it as probably 1/3 is volume and 2/3 we just an increase in rates overall. But -- just in terms of the supply chain itself, I mean, from our perspective, as Kiet said, our lead times are coming down to 6 weeks and no challenges in the supply chain.

Our next question is from Mark Davis Jones with Stifel.

Two, please. There's been a lot of focus on orders, but can I just talk about revenues and phasing of revenues? There's obviously still some catch-up going on in what you're shipping through, which you couldn't previously because of the supply chain things. Can we just have an update on how advanced that process is? Is the supply chain fully normalized, does that catch-up will come through? Or is there still some effect of that to come through the second half? And then the second one was just around this very strong electrification story within Oil & Gas. Is there any risk of a temporary slowdown in activity there ahead of U.S. election over the next few months?

Yes. Okay. I think in terms of the revenue split, I think last year, as -- we probably had a revenue split of around 45-55 first half to second half, and that was due to our supply chain disruptions. As I mentioned, this year, our lead times have been significantly improved. So for example, in the Bath example, it was 16 weeks first half of last year, it's 6 weeks first half of this year. So with last year, with the longer lead times, the orders were pushed into the first half of the year. So what we saw was a elevated or a temporary elevated order book, which we then delivered on in the second half of the year. I would say the order book is still elevated, but really, that's due to a function of us having good orders and a good book-to-bill above 1. So I would say supply chain disruptions are fully behind us now, and we are seeing normalized delivery. And do you want to add anything on that?

No, nothing to add.

Okay. I think in terms of the electrification, we actually have seen good momentum in North America and we've actually continued to see strong momentum in our orders in North America and upstream. So -- so I would say, look, the risk is there, but we're not seeing it yet. Does that help?

[Operator Instructions] Our next question is from Thomas Elgar with Deutsche Bank.

just one for me anyway. Would you be able to develop a little bit further on what you're seeing in battery value chain within CPI, if you're noticing the weakness mentioned in China, have you seen your customers become more hesitant globally? Just trying to understand if China is leading trends here or if we're still yet to see a leg down in other areas?

Okay. Yes, good question. I think with the battery value chain, as we highlighted, these are where we've concentrated on segments within the value chain of producing the batteries. So from the mining to the chemicals element to the actual manufacturing of the batteries themselves, as we said in CPI, we've seen a slowdown in terms of the nickel mining, nickel to [ clave ] mining projects. However, if you look at our Chemicals business, if you look at our HVAC business, where in Chemicals, we deal with the chemicals that goes inside the batteries or the manufacturing of the chemicals that goes inside the batteries. And if you look at HVAC, where we're supplying products into the battery storage facilities that slowdown hasn't happened as much and we're still seeing double-digit growth in the HVAC and specialty chems area. So it's really in the mining area where we're seeing the slowdown. I guess in terms of demand, I think end-user battery demand we're seeing is still okay. It's really the supply. And I think it's probably the oversupply of the nickel mining facilities. I think Ben coming from your previous history, you probably know more about that then say.

Well, I'll just probably reiterate Kiet's point. I mean it's very much a nickel-related point. And I think you probably read about the change in mix on some of the electric batteries that is driving that in terms of moving from a sort of lithium cobalt nickel mix and you're now going into something that's got ion and phosphate in. So again, you've probably seen some of the other larger refinery investments as well in Indonesia being pulled back as well, I think a large European chemicals manufacturer, I think announced last month, they weren't going to proceed with that. So it's very nickel-related.

Our next question is from Bruno Gjani with BNP Paribas Exane.

Could you provide me further color on the June and July order trends, which you are describing as encouraging, was at a notable step-up relative to the H1 run rate in absolute terms? Or if compared to the prior, is there anything in the prior base that we need to be aware of, essentially [ santis ] momentum improved in June and July. I was keen to understand by how much? And whether you think this improvement is sustained throughout the rest of the year?

No, I think the sentiment is we're entering into the second half with good momentum. I think that's the main gist of what we're saying. The end market outlooks are positive. And we wanted to give the view that we are seeing continued momentum going into the second half. Do you want to add anything to that, Ben?

I would say if you look at the run rates in June and July versus the previous 5 months, it's probably a run rate that's double digit higher than the prior 5 months.

All right. That's very, very helpful. And on the eFrac side, is that possible to perhaps provide some color in terms of the magnitude of that order and when it shifts?

Yes. I mean the magnitude, I can't specifically give, but it's over GBP 1 million, and it will ship in the second half of this year.

And sorry, just [indiscernible] the upstream development in terms of the self-development H1 because it looks slightly underwhelming relative the rest of the Oil & Gas division's performance. Sales roughly flat in H1 on an organic basis. I know the prior year comp was tough. But on an absolute basis, it wasn't running at a high level. But how do you, I guess, blame the more underwhelming self development in H1 for upstream. And I guess given all the positive sentiment around that end market or what are you seeing, is that just delivering basing of deliveries in the order on that side? Or is there something else happening?

Okay. I couldn't quite hear you, but I think what you were relaying to was the revenues in H1 for upstream. Is that right? And the momentum in H2?

Yes, that's right. I think -- just because it looks like underwhelming flat year-over-year development in upstream. So we're describing a very positive market environment. I was wondering what drives that or what's driven that basing on the order book or is it something else happening in the upstream side?

Yes, that's absolutely right. I mean I think Rotork quite difficult to compare quarter-on-quarter. And so it really is phasing of order books. Again, it goes back to longer lead times last year. Whereas lead times for North American upstream products out of our U.S. plant is now circa 4 weeks. And so it's probably -- it's more normalizing of order books and deliveries.

Our next question is from Maggie Schooley with Redburn Atlantic.

I had two, if I may. The first, you mentioned that the rollout of the ERP is going well. We have seen some hiccups in the sector on that. But can you just remind us of the time frame when you expect that full rollout should be completed and more just generally the phasing of that? And then secondly, just qualitatively, it's a shortfall on from both Andy and Jonathan's questions. when you start to sell these larger eFrac orders which go across multiple points. And given your route to market is varied, how are you selling this to other clients and customers? What -- how are you displaying the benefits to this? Are you bringing people in to see it? Or how can we think about how you're really getting the message out of the total cost reduction and the benefits of these projects given your route to market?

Okay. Maggie, thanks for the question. Do you -- I'll do the electrification first, and then I'll hand you over to Ben for the ERP. I mean it really comes down to our approach of winning business, and it's a great question because it highlights how we win business within our Target segments. And we've been working with this -- with our customer in the completion -- in that completion stage. They have been looking to electrify their products. They've obviously come to us being the #1 actuator supplier. And we've worked with them to develop their solution. In doing that, we understand the value proposition that it will give to that customer in terms of ease of installation, cost of -- to produce the eFrac platform as it were total kind of cost over the life. So we understand the application, we understand the customers' problems that they're trying to solve. And then we can take that and create a value proposition out of that. And then our sales force, our business development teams will obviously work with other customers in that industry to really promote the virtues of electrification. That's on one side. On the other side, I think that a lot of the operators are looking to reduce their Scope 1, Scope 2 anyway, so that it's already in their minds. So as what we found as one goes, the others will look across to see what's happening. And we're there really to promote in terms of how we solve problems and how we solve solutions for them. And that's how we really market, and that's how we expand and develop business across the upstream and the midstream for electrification. Hopefully that answers that. Do you want to do the ERP?

Yes. Maggie, just on the ERP. So just to remind everyone on the call. So at the end of last year, we'd spent GBP 45 million on business transformation. This year, we forecast another GBP 20 million, so it will be GBP 65 million at the end of this year. And then in total, we estimate the total cost of the implementation is going to be approximately around GBP 100 million. . In terms of your question around the progress, I think I recognize your point around there's a few ERPs, a bit of bad press recently. I've never found one that gets good press, if I'm being honest with you, given the challenges around doing them. But I think we need to be honest that I think some of this spend is no longer discretionary. I think a lot of businesses that have been operating on disparate ERP systems given the challenges we've got around cyber and cybersecurity, I think moving to a single ERP is a lot safer. So I think I'd make that point. I think the second point you heard me speak about at the start when I spoke to Andy, I think how do we simplify our processes and systems to really, I think, enhance how we operate internally and deal with our customers. And I think if you don't have a single ERP, it's very difficult to do that. So I think that will facilitate that. I think the second thing is, once we've got a controllable and scalable ERP system, it's very much around cost avoidance going forward. So this is very much around you become people agnostic as you really automate your processes. So as Kiet myself and the rest of the team want to grow the business mid- to high-single digits, we can do that without putting a huge amount of cost into the business. And finally, I'll just say in terms of the rollout itself and the progress. We've gone live in Bath, which is our biggest site at the back end of last year. We had some lessons learned from that. We are now preparing to go live in some of our European entities. The team, we've got a fantastic team. It's working, working really hard to make sure it's a success. And we anticipate that we should be fully rolled out towards the end of 2026 or the start of 2027 around that time frame.

Our next question is from Hemal Bhundia with UBS.

Hemal Bhundia from UBS. First, could you just provide a bit of color on what LNG would intake look like in the quarter and what you're seeing across different regions in the space? And then just a quick follow-up. How well is your supply chain operation self in a scenario of potential trade tariffs?

So could you just repeat the last question for us?

Sure, I just wanted to understand how your supply chain operations are set up in scenario potential trade tariffs?

Okay. Understood. I think the LNG segment for us, we -- traditionally, Rotork has always been very strong in LNG. At the moment, what's happening is we're tracking a number of projects. We're very later cycle. So we have sites of those projects coming through. Typically, what would happen though is our customers and the valve makers will receive the orders and then we will receive the orders further down the line. Whilst we've seen a level of LNG activity, we haven't really seen the orders come through in terms of the big uptick. And we've always said we anticipate that coming through or starting to come through in 2025. So that's really still the case. But we're tracking all of these projects, and we know what's coming through the pipeline. So we're confident that LNG will be good for us going forwards. In terms of the tariffs, we predominantly run what we call a local for local. So it's really a region for region. So whatever we produce in a region, we predominantly buy those products for our supply chain in that region with the exceptions of chipsets, which kind of originate from Taiwan and the Far East. So in terms of tariffs, we're pretty well set up. We've also got very good pricing power, and we've demonstrated over the kind of supply chain disruption years that we can put through successfully pricing to cover inflationary costs, be it materials, logistics costs, labor costs. So we're confident that we can offset any tariff or import duties to carry on maintaining our margins. Do you want to add anything?

This marks the end of the Q&A session. I will now hand back over to Kiet for any closing remarks.

Yes. Once again, thank you, everyone, for dialing in, and thank you for your interest in Rotork. If I can summarize, we've had a very good start to the year. I'm very pleased with performance. which culminated in double-digit increase in revenues, adjusted profit and in EPS. We've got a strong financial position, which gives us good flexibility to carry on with investing in our organic growth, in shareholder returns and in bolt-on acquisitions. The end market outlook for us is positive. We've got good visibility going into the second half and our full year expectations are unchanged. So thank you very much for your time, everyone, and thanks for dialing in.