2023 Interim Results

 Tuesday 8th August 2023

Rotork plc

2023 Interim Results

Good first half, expectations for the full year unchanged

Summary

· Order intake increased 11.9% year-on-year OCC, largely driven by volume, resulting in a record order book at period end

· Revenue increased 17.2% year-on-year OCC against a more supply-chain disrupted comparative period, and despite some supply-chain challenges continuing. All divisions grew at rates consistent with the Group, with Target Segments delivering premium growth as expected

· Good progress under all Growth+ pillars with new product and digital services launched and a bolt-on technology platform acquisition

· Adjusted operating margins 50bps higher at 19.5% reflecting increased volumes partly offset by Growth+ investments. The reported operating profit margin was 17.7%

· ROCE4 was 32.7% (up 570bps). Strong balance sheet retained with closing net cash of £97.8m (December 2022: £105.9m) reflecting 116% cash conversion and a £20m special pension contribution which facilitated a buy-in, further de-risking the pension scheme

Kiet Huynh, Chief Executive, commenting on the results, said: 

"I'm pleased with our performance in the first half, in particular with double-digit year-on-year growth in orders and sales, the improvement in operating margin and the progress made under the Growth+ strategy.

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 OCC basis."

1 Order intake represents the value of orders received during the period.

2 Adjusted4 figures exclude the amortisation of acquired intangible assets and other adjustments (see note 4).

3 OCC4 is organic constant currency results restated at 2022 exchange rates.

4 Adjusted figures, organic constant currency ('OCC') figures, cash conversion and ROCE are alternative performance measures and are used consistently throughout these results. They are defined in full and reconciled to the reported measures in note 2.

There will be a meeting for analysts and institutional investors at 9.30am GMT today in the Library at the offices of JPMorgan Cazenove, 60 Victoria Embankment, London EC4Y 0JP. The presentation will also be webcast, with access via https://www.investis-live.com/rotork/64a8143a2be9e4130067c8af/sahka. Please join the webcast a few minutes before 9.30am to complete registration.

Summary

Purpose

Our Purpose and sustainability vision are one and the same: keeping the world flowing for future generations. We want to help drive the transition to a sustainable future where environmental resources are used responsibly. We have a major role to play in new energies and technologies that will support the transition to a low carbon economy, as well as helping preserve natural resources such as fresh water and reducing energy sector methane emissions.

Performance

The safety of colleagues, partners and visitors is Rotork's number one priority and the Group's vision for health and safety is zero harm. In the first half of 2023 the lost-time injury rate was 0.07, an encouraging improvement on the 0.20 in the first half of 2022, in part reflecting the extensive work completed across the Group to implement its 12 Global Safety Standards. The Total Recordable Injury Rate in H1 2023 was 0.20 (H1 2022: 0.39).

Order intake increased 13.8% year-on-year to £386.9m (11.9% on an organic constant currency or OCC basis). All three divisions booked higher orders, with Oil & Gas and Water & Power strongly ahead. Oil & Gas order intake was the largest it has been in a six-month period since 2019. Orders, which overall continue to be driven predominantly by customers' operational spend, included more large orders than seen for some time.

Whilst the period saw benefits from supply chain improvement measures, the supply chain challenges faced in recent years have not entirely disappeared. During the period the Group experienced amongst other things disruption to the supply of semi-finished components such as circuit boards. Rotork is working together with its suppliers to improve availability and saw some improvement in deliveries towards the end of the period. 

Group revenue was 19.5% higher year-on-year (17.2% higher OCC), benefiting from a lower level of supply chain challenges. Higher volumes contributed around two-thirds of the Group sales increase. Oil & Gas sales rose 19.5% (16.4% OCC), driven by the Americas and Europe, Middle East & Africa ('EMEA') regions. CPI sales were 19.0% ahead (17.2% OCC), with all geographic regions higher. Water & Power sales were up 20.4% (18.7% OCC), with all regions ahead and the Americas seeing a particularly strong improvement.

By geography, Asia Pacific revenues by destination grew mid-single digits year-on-year on an OCC basis driven by solid performances from CPI and Water & Power. EMEA sales grew double digits, benefiting from Oil & Gas strength. Americas revenues were also ahead double digits (OCC) with all divisions delivering strong growth.

Rotork Site Services, Rotork's global service network and a key differentiator in the industry, performed well with revenue growth broadly in-line with the Group overall. The recently launched enhanced Intelligent Asset Management predictive analytics system has been well received by customers and has good momentum.

Adjusted operating profit was 22.5% higher year-on-year (20.2% at OCC) at £65.3m, reflecting volume growth and positive net price/mix which together were partly offset by annual wage inflation, investment in our Growth+ strategy and the bringing forward of salary increases. Adjusted operating margins were 50bps ahead year-on-year at 19.5%. Reported profit before tax was £60.2m.

Return on capital employed was 32.7% (H1 2022: 27.0%), benefiting from the increase in adjusted operating profit. Cash conversion was 116% (H1 2022: 68%). First half cash conversion benefited from the normalisation of receivables balances which were unusually high at the December year-end. Rotork's balance sheet remains strong, with a closing net cash position of £97.8m after a £20m special pension contribution which facilitated a buy-in, further de-risking the pension scheme.

Rotork is targeting net-zero by 2035 for scopes 1 and 2 and to encourage achievement during the period incorporated near-term absolute scope 1 and 2 reduction targets into its long-term incentive plan. Good progress was made securing renewable energy contracts and these are now in place at more than a fifth of Rotork sites. Rotork is targeting net-zero by 2045 for scope 3. This is a medium-term project and the foundations have been laid by building sustainability goals into our product development process.

Market update

The outlook for the end markets we serve remains positive.

The recovery in oil & gas sector activity first experienced in the second half of 2021 continued through the first half of 2023. Hydrocarbons will have 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. Whilst hydrocarbon prices have fallen from the highs of 2022, they remain above incentive levels in most regions and large project activity remains elevated. The events in Ukraine have also necessitated a reconsideration of energy security risks with the result that LNG is having a larger role.

Methane emissions reduction remains an industry priority and our IQTF has been established as the leading electric actuator for upstream oil & gas choke valve applications. COP28, to be held in Dubai in November, is expected to call for a step-up in policy and financing efforts directed at methane emissions reduction.

The metals and mining sectors are major beneficiaries of the global mega trends of electrification and decarbonisation, and significant new resources and processing plants are scheduled to be commissioned in the next couple of years. Metals benefiting from the transition include aluminium, cobalt, copper, lithium and nickel. 

The United States' Inflation Reduction Act and the European Union's similar initiatives are supporting the carbon capture and storage and hydrogen sectors and we saw a marked pick-up in enquiries and quotation activity in the period. If passed, the United States' Environmental Protection Agency's proposed new carbon pollution standards are expected to provide further stimulus, particularly to the carbon capture sector.

The water and wastewater sector continues to increase investment in new and existing infrastructure. The sector is focused on delivering water availability, improving water quality, reducing leakage and climate change adaptation. The desalination segment remains active, and new market opportunities are presenting themselves (for example, desalination plants in hydrogen facilities).

Growth+ strategy update

In November 2022 we presented our new Growth+ strategy at a Capital Markets Event. The starting point of Growth+ is our purpose, 'keeping the world flowing for future generations'. Our Purpose remains a powerful motivator, and it drives everything we do. It recognises the important part that we play in making our world a great place in which to live, but also the role we can play helping improve the safety, environmental and social performances of not just ourselves, but also those of our end users, customers, suppliers and communities.

Our vision is for Rotork to be the leader in intelligent flow control. This recognises the ever-increasing importance of connectivity to our end users. Today's intelligent flow control systems not only ensure safety, they are also reliable, efficient and easy to use and play a vital role in ensuring the uptime of our end users' operations (including through predictive and preventative maintenance).

Growth+ is designed to deliver our ambition of mid to high single-digit revenue growth and mid 20s adjusted operating profit margins over time. The levers are its three pillars of Target Segments, Customer Value and Innovative Products & Services, each underpinned by our 'Enabling a Sustainable Future' initiatives.

We made good progress in Target Segments, which delivered premium growth in the period. Successes in Oil & Gas included in the North American upstream methane emissions reduction segment, where our IQTF range has established itself as the leading electric actuator for choke valve applications, and in LNG where we won a sizeable order for actuation equipment destined for a major liquefaction project in the United States. Successes in CPI included being chosen to supply a large actuation package to a major nickel/cobalt processing plant in Indonesia. Water & Power won a very significant network automation project in the Middle East. 

During the half year we accelerated our business transformation. We are transforming Rotork through implementing and integrating common systems and processes throughout the Group. This will improve efficiency and ultimately deliver improved lead times and an enhanced customer experience. An important milestone was passed in Q1 with the successful first deployment of our new Enterprise Resource Planning system at our Bath site. The Microsoft Dynamics 365 based system integrates into our existing Group-wide Customer Relationship Management application. Implementation across all sites will take place over the next 3-4 years.

Our Innovative Products & Services pillar also has good momentum. During the period we launched the IQ3 Pro and its accompanying smartphone app. The new IQ3 offers greater connectivity than its predecessor and the smartphone app enables intelligent configuration and operation. Our enhanced Intelligent Asset Management condition monitoring and analytics software has been well received by customers who appreciate its expanded diagnostic and predictive functions. After the period end we made a small acquisition adding a compact high torque electric valve actuator range to our product offering.

Capital allocation

We retain a strong balance sheet, with a net cash position of £97.8m at the period end (31 December 2022: £105.9m). This, together with good cash generation, provides us with the financial flexibility to pursue our organic investment plans, pay a progressive dividend and execute our targeted M&A strategy. We regularly review our capital needs, in line with our capital allocation strategy, and have demonstrated discipline and flexibility in our use of buybacks and dividends to deliver returns for shareholders. In the event that in the future we determine we have surplus cash, we will return it to shareholders via share buybacks.

On 4 August Rotork acquired Montreal (Canada) headquartered Hanbay Inc ("Hanbay"). Hanbay designs and manufactures compact, high torque electric valve actuators for both non-hazardous and hazardous applications. The acquisition expands Rotork's electric actuator offering and is fully consistent with all three pillars of the Growth+ strategy and increases the percentage sales contribution of our Eco-transition portfolio. Hanbay sales in 2023 are expected to be in the region of CAD10m with margins in-line with the Rotork Group average.

We recognise the importance of a growing dividend to our shareholders and are committed to a progressive dividend policy subject to satisfying cash requirements. The Board is declaring an interim dividend of 2.55p per share which is equivalent to 2.3 times cover based on adjusted earnings per share.

The interim dividend will be payable on 22 September 2023 to shareholders on the register on 18 August 2023. The ex-dividend date is 17 August 2023. The last date to elect for the Dividend Reinvestment Plan ('DRIP') is 4 September 2023. 

Board update

Ann Christin Andersen has decided that due to other commitments she will not seek re-election as a Director of Rotork at the AGM in April 2024. When Ann Christin steps down she will have served Rotork for more than five years. We thank Ann Christin for her service and will announce her replacement in due course.

Outlook

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 OCC basis.

Divisional review

Oil & Gas

Oil & Gas sales were 16% ahead year-on-year (OCC) against a supply-chain disrupted comparative period. Divisional revenues benefited from both volume and selling price increases. All segments grew and downstream sales represented 47% of the total (52% in H1 2022); upstream 29% (24%) and midstream 24% (24%).

The EMEA geographic region reported double-digit revenue growth year-on-year (OCC), with all three segments (upstream, midstream and downstream) strongly ahead, benefiting from increased activity in the Middle East. The Americas reported the strongest growth with US upstream benefiting from the increase in methane emissions reduction related sales. In APAC, double-digit year-on-year revenue growth in the upstream segment was not sufficient to offset lower downstream and midstream sales, reflecting the non-repeat of larger projects.

The division's adjusted operating profit was £31.3m, 33.0% up year-on-year. Positive pricing more than offset adverse product mix and any impact of higher material costs. The benefit of strong volume growth, improved labour productivity and a slower rate of overhead growth resulted in adjusted operating margins rising 210 basis points to 21.4%.

Oil & Gas' focus on target segments delivered notable successes during the period. The Rotork IQTF established itself as the leading electric actuator for wellhead choke valve methane emissions reduction applications in the North American upstream market. In the LNG segment Oil & Gas received a major actuation package order from a liquefaction project in Texas. In India the Rotork team won a large order for electric actuators and controls systems, together with a five-year maintenance and service contract, for a multi-location tank farm automation project.

Chemical, Process & Industrial ("CPI")

CPI is a supplier of specialist actuators and instruments for niche applications in the broad chemical, process industry and industrial sectors. The division serves a broader range of end markets than Rotork's other divisions and typically has a shorter order backlog.

The division delivered a good sales performance with revenues 19% higher year-on-year. Asia Pacific sales grew year-on-year OCC, benefiting from our coverage expansion initiative and growth in target segments including HVAC and mining. EMEA revenue growth was in the mid-teens. The Americas was CPI's fastest growing geographic region.

The division's adjusted operating profit was £25.0m, 10% higher than the prior year. Adjusted operating margins fell 180 basis points to 22.7%. Particularly strong revenue growth in fluid power actuators contributed to a negative product mix which, even with improved direct labour productivity, meant a decline in gross margin. With overheads then increasing slightly ahead of the Group average this resulted in a 180bps reduction in adjusted operating margin.

CPI is benefiting from the pursuit of its chosen Growth+ target segments such as decarbonisation (hydrogen and carbon capture, usage and storage), chemicals, HVAC (semi-conductor, lithium-ion battery and data centre) and mining. Rotork's electric and fluid power actuators and MasterStation control systems were selected to control fluids at a major new ethylene (chemical) multi-phase project in China. Rotork Schischek explosion proof actuators were specified as part of a HVAC upgrade at a pharmaceutical ingredient plant in Switzerland. Rotork's electric actuators and emergency shutdown duty fluid-powered actuators were chosen to automate a major nickel/cobalt processing plant in Indonesia.

Water & Power

Water & Power is a supplier of premium actuators, predominantly electric, and gearboxes for applications in the water, wastewater treatment and power generation sectors. The water segment contributed 68% of divisional sales in the period (66% in H1 2022).

Sales in the half were ahead 19% year-on-year (OCC) against a particularly supply-chain disrupted comparative period. Asia Pacific sales were low-teens ahead year-on-year (OCC). Sales in the Americas grew strongly year-on-year driven by higher water sector activity and was the fastest growing geographic region. EMEA sales grew year-on-year benefiting from higher power station refurbishment revenues.

The division's adjusted operating profit was £17.0m, 27.1% higher year on year. Volume accounted for more of the revenue increase in this division than the other two and, with positive product mix, this more than covered any material cost increases. This, together with improved labour productivity, resulted in adjusted operating margins increasing 110 basis points to 21.8% despite overheads growing fastest in this division.

The division made good progress in its target segments of water infrastructure, waste and wastewater treatment, desalination and alternative energy during the period. Rotork actuators were selected by a Middle Eastern end user for a large water infrastructure network automation project. Rotork's IQ3 electric actuator range was picked for a major upgrade project at a drinking water purification plant in the United States Midwest. In the alternative energy space, Rotork IQ series intelligent electric actuators were chosen to control cooling circuits on HVDC platforms destined for North Sea (UK) offshore wind farms.

By order of the Board

Kiet Huynh

Chief Executive

7 August 2023

Condensed consolidated Statement of Changes in Equity

Condensed consolidated Statement of Cash Flows

Notes to the Half Year Report

1. Status of condensed consolidated interim statements, accounting policies and basis of significant estimates

General information

Rotork plc is a company domiciled in England and Wales. The Company has its premium listing on the London Stock Exchange.

The condensed consolidated interim financial statements for the six months ended 30 June 2023 are unaudited and the auditor has reported in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity'.

The information shown for the year ended 31 December 2022 does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2022 were approved by the Board on 27 February 2023 and delivered to the Registrar of Companies. The auditor's report on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 (2) or (3) of the Companies Act 2006. The consolidated financial statements of the Group for the year ended 31 December 2022 are available from the Company's registered office or website.

Basis of preparation

The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2023 comprise the results for the Company and its subsidiaries (together referred to as 'the Group'). These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the United Kingdom. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2022, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) adopted by the United Kingdom.

Going concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, we continue to adopt the going concern basis in preparing the condensed consolidated interim financial information.

In forming this view, the macroeconomic conditions, the impact of supply chain disruption and geo-political instability on the Group has been considered. The directors have reviewed: the current financial position of the Group, which has net cash of £97.8m and unused overdraft facilities of £24m as at the period end; the significant order book, which contains customers spread across different geographic areas and industries; and the trading and cash flow forecasts for the Group. The directors are satisfied that the Group has adequate resources to continue operating as a going concern for the foreseeable future, and that no material uncertainties exist with respect to this assessment. The Group also has a number of mitigating actions that it can take at short notice to preserve cash, for example reduction in capital programmes, dividend deferral and other reductions in discretionary spend.

Critical accounting estimates and judgements

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances.

In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the current financial year are discussed in the financial statements for the year ended 31 December 2022.

Accounting policies

The accounting policies applied and significant estimates used by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements for the year ended 31 December 2022, except for the adoption of new standards effective as of 1 January 2023. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Non-controlling interests

Non-controlling interests in subsidiaries are identified separately from the Group's equity therein. The interest of non-controlling shareholders is initially measured at the non-controlling interests' proportion of the share of the fair value of the acquiree's identifiable net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests' share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

New accounting standards and interpretations

Other amendments

A number of amended standards became applicable for the current reporting period. The application of these amendments has not had any material impact on the disclosures, net assets or results of the Group.

New standards and interpretations not yet adopted

There are no further narrow scope amendments which have been issued where the application of the amendments would have a material impact on the disclosures, net assets or results of the Group.

2. Alternative performance measures

The Group uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believe these measures provide stakeholders with additional useful information to facilitate greater comparison of the Group's underlying results with prior periods and assessment of trends in financial performance.

The Group believes alternative performance measures, which are not considered to be a substitute for, or superior to, IFRS measures, provide stakeholders with additional helpful information on the performance of the business. These alternative performance measures are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.

The key alternative performance measures that the Group use include adjusted profit measures and organic constant currency (OCC).

Explanations of how they are calculated and how they are reconciled to IFRS reported results are set out below.

a. Adjusted operating profit

Adjusted operating profit is the Group's operating profit excluding the amortisation of acquired intangible assets and other adjustments as defined below. Adjustments to profit are items of income and expense which, because of the nature, size and/or infrequency of the events giving rise to them, merit separate presentation. These specific items are presented as a footnote to the income statement to provide greater clarity and an enhanced understanding of the impact of these items on the Group's financial performance. In doing so, it also facilitates greater comparison of the Group's underlying results with prior periods and assessment of trends in financial performance. This split is consistent with how underlying business performance is measured internally.

Adjustments to profit items may include but are not restricted to: costs of significant business restructuring including any associated significant impairments of intangible or tangible assets, adjustments to the fair value of acquisition related items such as contingent consideration, acquired intangible asset amortisation and other items considered to be significant due to their nature or the expected infrequency of the events giving rise to them.

Further details on these adjustments are given in note 4.

b. Adjusted profit before tax

The adjustments in calculating adjusted profit before tax are consistent with those in calculating adjusted operating profit above.

c. Adjusted basic and diluted earnings per share

Adjusted basic earnings per share is calculated using the adjusted net profit attributable to the ordinary shareholders and dividing it by the weighted average ordinary shares in issue.

Adjusted net profit attributable to ordinary shareholders is calculated as follows:

Diluted earnings per share is calculated by using the adjusted net profit attributable to ordinary shareholders and dividing it by the weighted average ordinary shares in issue adjusted to assume conversion of all potentially dilutive ordinary shares (see note 9).

d. Return on capital employed

The return on capital employed ratio is used by management to help ensure that capital is used efficiently.

1 defined as the average of the capital employed at June 2022, December 2022 and June 2023 (2022: June 2021, December 2021, and June 2022).

2 defined as the average of the capital employed at December 2021 and December 2022.

e. Working capital as a percentage of revenue

Working capital as a percentage of revenue is monitored as control of working capital is key to achieving our cash generation targets. It is calculated as inventory plus trade receivables, less trade payables, divided by revenue.

f. Organic constant currency (OCC)

OCC results remove the results of businesses acquired or disposed of during the period that are not consistently presented in both periods' results. The 2023 half year results are restated using the average exchange rates applied for the 2022 comparative period.

For businesses acquired, the full results are removed from the year of acquisition. In the following year, the results for the number of months equivalent to the pre-acquisition period in the prior year are removed. For disposals and closure of businesses, the results are removed from the current and prior periods.

There are no acquisitions or disposals in the current and prior periods.

Key headings in the income statement are reconciled to OCC as follows:

g. Cash conversion

Cash conversion is calculated as adjusted operating cash flow as a percentage of adjusted operating profit. It is monitored to illustrate how efficiently adjusted operating profits are converted into cash. Adjusted operating cash flow is calculated as follows:

3. Analysis by operating segment

The three identifiable operating segments where the financial and operating performance is reviewed monthly by the chief operating decision maker are as follows:

· Oil & Gas

· Chemical, Process & Industrial

· Water & Power

Unallocated expenses comprise corporate expenses.

Half year to 30 June 2023

Half year to 30 June 2022

Full year to 31 December 2022

Revenue by location of subsidiary

4. Other adjustments

The other adjustments are adjustments that management consider to be significant and where separate disclosure enables stakeholders to assess the underlying trading performance of the Group on a consistent basis.

The other adjustments to profit included in reported profit are as follows:

The £723,000 (2022: £1,209,000) gain on disposal of properties relates to the sale of two properties (2022: one property) in the period which were exited as part of the Growth Acceleration Programme, footprint optimisation.

During the period £5.9m of costs were incurred on business transformation. The multi-year transformation includes the implementing and integrating of common systems and processes throughout the Group, including a new cloud-based ERP system. This brings the total expensed under the programme to £37.7m. These costs were expensed as they do not meet the capitalisation criteria under IAS38. 

The new ERP system launched at the Bath, UK factory in Q1 2023 and is due to go live at the Head Office site in Q3 2023. The next phase of the programme is the implementation of the new ERP system and integration of common business processes across the other Group entities. It is estimated that a further £50m to £55m will be incurred over the next 3 - 4 years to complete the implementation. These costs will continue to be reported in adjusted items. 

All adjustments are included in administrative expenses. The adjustments are taxable or tax deductible in the country in which the expense is incurred.

5. Finance income