Rotork H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 11, 2025

There are 10 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us as we discuss our 2024 Full Year Results. Alongside me is Ben Peacock, our CFO. In terms of the agenda today, I'll start with the 2024 highlights, then hand over to Ben for the financial review. After which, I'll talk about the acquisition of Noah, provide a Growth Plus update and then discuss the outlook before ending on Q and A.

Operator

Moving to the highlights, we delivered another year of strong progress in 2024 with the Growth plus strategy well established and delivering on our financial ambitions of mid- to high single digit revenue growth and mid-20s operating margins over time. Group revenues grew 8.2% year on year on an OCC basis with Oil and Gas and Water and Power revenues double digits higher. CPI sales returned to growth in the second half. Road Talk Service performed very strongly, growing faster than the Group and contributed 23% to Group revenues in the year. Our adjusted operating margin increased 70 basis points to 23.6%, reaching the highest level since 2014.

Operator

The increase in margin reflects higher sales and solid operating leverage. Road Talk achieved very high returns with a capital light assembly and test operating model. It's an exceptionally efficient capital user and return on capital employed rose year on year to above 37%. Cash conversion in the period was good, leaving net cash at million after having spent million on dividends and million on share buybacks. Safety remains the top priority at RoadTalk and we once again delivered an improvement in our total recordable incident rate.

Operator

I'd like to take this moment to thank all RoadTalk colleagues for their commitment and hard work during the year. I'm incredibly proud of what we've achieved together. Now three years in, the benefits of Growth plus are evident. Since the program launched in 2022 and through our target segments, we have built on the powerful megatrends of automation, electrification and digitalization, as well as the trends of water scarcity and quality, energy security and decarbonization. This has resulted in group revenues growing at a 10% CAGR on an OCC basis and the adjusted operating margin increasing 110 basis points to close to 24% after Growth plus investments.

Operator

All three divisions have contributed to the strong revenue growth over the period with Oil and Gas growth in the low double digits and Water and Power and CPI growing high single digits. The rebranded Road Talk service has also contributed strongly, growing at a 14% CAGR over the period and now representing 23% of Group revenues. Finally, return on capital employed has improved seven twenty basis points from 30% in 2021 to over 37% in 2024. The target segments approach is a key pillar of our growth plus strategy and represents approximately 50% of our revenues and has served to accelerate our sales growth. Target segments are markets we have identified which offer significant profitable growth opportunities and where we are or can be market leaders through our exceptional products and service offerings.

Operator

Our divisional teams with a commercial and business development approach are responsible for selecting their target segments and executing growth. We encourage our teams to be agile and to continually seek and develop new target segments linked to macro drivers to build on our growth momentum. We have executed the target segments pillar of the Growth plus strategy very well over the past three years and in 2024 delivered high single digit sales growth. This growth was driven by segments such as Midstream Electrification, Critical HVAC and Water. Chemicals also grew, outperforming the wider market with our focus on Specialty Chemicals.

Operator

Within 2024, core segment sales also grew high single digit, benefiting from strength in the downstream and traditional power sectors. Road Talk service played a big role in our strong growth in 2024, growing faster than the group. Road Talk service contributes to both targets and core segments with a slightly higher contribution to core segments due to our large installed base. In summary, Roadtalk is delivering structural growth through our target segments and Roadtalk service. Road Talk's consistent high returns are the result of its competitive strengths, barriers to entry and route to market.

Operator

Road Talk's competitive strengths are its brand and reputation, its customer references, its product quality and reliability, its relationships and of course, RoadTalk service, which is unique in the industry. The barriers to entry into RoadTalk's markets are also high. Road Talk products have to satisfy challenging and complex certification requirements which differ from industry to industry and geography to geography. Customers typically award only a small number of suppliers with a place on their approved vendor list and in many cases customers have their own certification requirements too. Road Talk's route to market being specified by end users and EPCs and then selling indirect for a broad range of valve makers provides pricing power, further boosting returns.

Operator

The result as shown here is Road Talk having upper quartile return on capital employed at 37% in 2024. This slide highlights our strong free cash flow generation and our continued deployment of disciplined capital allocation. We have a promising pipeline of bolt on acquisition opportunities and throughout 2024 continued to identify further prospects. We are looking at opportunities in various market segments with technologies including electric actuation, instrumentation and sensing. In 2023, we made our first acquisition for several years, purchasing the small electric actuator manufacturer, Hanbay, for million.

Operator

In 2023, together with the dividend, we allocated million to shareholder returns and strategic investments. In 2024, whilst we considered several transactions non converted and we decided to return cash to shareholders via a buyback. In total, we allocated million in the year, this time entirely through shareholder returns. You will have seen that we have made two other announcements today. The agreement to acquire Noah Actuation and attractive bolt on acquisition for million and another share buyback of million.

Operator

With these two announcements alone, we are

Speaker 1

on track to allocate more capital in 2025 than we did last year. With that, I'll hand over to Ben for the financial review. Thank you, Gig, and good morning, everyone. I'm pleased to report that with the strong execution of our Growth Plus strategy, the group has delivered a great set of financial results with good revenue and margin progression, together with continued strong cash conversion and return on capital. In the following slides, I'll walk you through the highlights of our performance, but please note that the appendix contains some more specific details on our 2024 results.

Speaker 1

If we now turn to the numbers. Orders received at million were up 6.1% versus prior year on an organic constant currency or OCC basis, with all divisions delivering growth. Revenue at million is 8.2% higher than prior year on an OCC basis and 4.9% ahead on a reported basis, impacted by a foreign exchange translation headwind of million. From a divisional perspective, both Water and Power and Oil and Gas achieved double digit revenue growth on an OCC basis. This was partially offset by CPI, which was adverse to prior year by 1.1% as a result of reduced nickel mining project activity.

Speaker 1

Rotalk service performed well with revenue continuing to grow faster than the group as contribution of group sales has now increased to 23%. Adjusted operating profit of million is 8.5% higher versus prior year and margins at 23.6% are at 70 basis points on a reported basis. This includes a currency headwind of £7,000,000 or 30 basis points. The group continues to be cash generative with cash conversion in line with prior year as 119% and we closed the period with net cash of million. Our increased profitability resulted in adjusted earnings per share of 15.9p, which is an increase of 8.7% versus prior year and return on capital improved $3.40 basis points to over 37%.

Speaker 1

Finally, the proposed final dividend of 5p per share will take the full year dividend to 7.75p, which is 7.6% higher than prior year and two times covered on an adjusted earnings basis. If we now turn to the divisions and starting with Oil and Gas. Divisional sales grew 11.7% OCC with all geographic regions growing and EMEA and Asia Pacific particularly strong with double digit revenue growth. EMEA was the fastest growing region, driven by strong sales in The Middle East and Africa with the midstream electrification sector particularly active. From a sector perspective, downstream sales were double digits higher on an OCC basis, following low single digits growth in 2023 and continues to provide the largest contribution of segment revenue at 52%.

Speaker 1

Sales to midstream customers were up low double digits OCC, while sales to upstream customers were broadly unchanged year on year. Adjusted operating profit at million is up 10% on a reported basis. The 40 basis points adjusted operating margin improvement reflects higher volumes offset by mix and investment in the division's commercial teams. Turning to CPI. Revenues were 1.1% lower year on year on an OCC basis, driven by the previously reported non repeat of large nickel projects in H1 despite a return to growth in the second half of the year.

Speaker 1

By destination, EMEA sales grew mid to high single digits with all sub regions higher year on year. Asia Pacific sales were lower despite good growth in India, whilst America sales were low mid single digits. Overall, India, The Middle East and Latin America continue to be growth drivers for the division. From a target segments perspective, critical HVAC grew low double digits due to increasing global demand for industrial specialty HVAC technology and data center investments. Adjusted operating profit at million is 3.4% higher than last year on a reported basis.

Speaker 1

Favorable mix as well as disciplined cost management resulted in 180 basis points increase to adjusted operating margins of 25.8%. Moving to Water and Power. Sales were up 13.1% on an OCC basis with both sectors growing strongly, but with Water growing slightly faster than Power. All regions delivered double digit revenue growth with The Americas being the fastest growing geography. Asia Pacific sales were ahead low double digits over the prior year with India's Waterfall initiative continuing to drive very strong growth in the country.

Speaker 1

And finally, EMEA sales grew low double digits on an OCC basis despite lower power sector activity. From a target segment's perspective, we saw particularly strong growth in water infrastructure and desalination. Adjusted operating profit for the division at million is 21.3% higher than the previous year on a reported basis. The higher volumes and improved mix resulted in adjusted operating margins increasing two ninety basis points to 29.1%, returning the division to historic margin levels. If we now move to the profit bridge.

Speaker 1

This adjusted profit bridge shows strong profit growth driven by increased revenues and positive operating leverage. The volume increase reflects the positive contribution for revenue growth and price increases are back to more normalized levels of around 1% to 2%, which more than cover annual salary increases. The £15,000,000 remaining increase in operating expenses is largely related to higher people costs, which are a mix of higher variable compensation and additional headcount and other investments to support the Growth Plus strategy. Reflecting our operating leverage, adjusted operating margins grew 70 basis points to 23.6% on a reported basis. The currency headwind on adjusted operating profit of £7,000,000 I mentioned earlier trimmed 100 basis points OCC margin progression by 30 basis points.

Speaker 1

If we now turn to the items below operating profit. Firstly, in relation to The UK defined benefit pensioner scheme, a second buy in policy was purchased during the year, which resulted in the recognition of a one time non cash settlement loss on our UK pension scheme. The loss reflects the difference between the premium paid by the trustees to ensure the remaining scheme liabilities and the valuation under accounting standards. The result of this second buy in is the DB scheme is now effectively derisked at a time the liabilities will be transferred to a third party insurance provider. Similar to last year, the majority of the adjusting items relate to our business transformation program.

Speaker 1

A further £17,200,000 was incurred in implementing the new ERP system and the associated systems and processes throughout the group. We recently went live at our Langensohn site in Germany and more sites are scheduled for 2025. Other costs largely relate to the previously reported relocation to our new factory in Changzhou, China, which formally opened in November. Finally, tax rates have moved slightly higher this year. The reported effective tax rate and adjusted effective tax rate have both increased 70 basis points, largely driven by the increase in UK tax rates.

Speaker 1

Turning to cash flow, we continue to be cash generative, providing the funding for organic growth, strategic investments and returns to shareholders, as Gigg outlined earlier. Operating cash conversion for the full year was 119%, supported by a two twenty basis points reduction in working capital to 25.1% of sales. Good progress was made in reducing receivables as a percentage of sales as well as improving inventory turns. Positive free cash flow of million was up 5.4% on the prior year with higher CapEx in the year driven by the relocation of our new China facility mitigated by reduced pension costs following the special contribution of £20,000,000 in the prior year. Free cash flow includes overall R and D cash spend of million as we continue to invest in new products and our investment in the business transformation program.

Speaker 1

Moving to capital allocation. During the year, we returned £113,000,000 to shareholders via dividends of £63,000,000 and the £50,000,000 share buyback. We finished the year with £125,000,000 of net cash, comprising total cash and cash equivalents of £150,000,000 and lease liabilities of £25,000,000 In the second half of the year, the group also strengthened its liquidity by entering into a £75,000,000 3 year revolving credit facility. I'm pleased to highlight the further £50,000,000 share buyback which was announced today and the £44,000,000 acquisition of Noah. The Group's balance sheet continues to remain strong and provide us with strategic flexibility as we enter 2025.

Speaker 1

And finally, on guidance for the current year. Based on current exchange rates, we currently estimate currency headwinds of 1% to 2% of sales. Following the investment in our new China factory in 2024, we expect CapEx to normalize back to around £15,000,000 Spend on the business transformation program will increase this year, rising from £17,000,000 to £30,000,000 before declining through 2026 and 2027. In summary, we enter 2025 with encouraging order intake and are well positioned to deliver another year of strong financial returns and cash generation, which will enable us to fund our capital allocation priorities. I will now hand you back to Gig.

Operator

Thanks, Ben. I'll start by talking about Noah Actuation, a leading South Korean electric actuator manufacturer and a company we've been building our relationship with for over five years now. We are very excited to have Noah on board. The acquisition is fully consistent with the GROW plus strategy and aligns with our target segment approach, especially in Water and Power and CPI, as well as in Oil and Gas up Stream and Mid Stream Electrification. We have known the company for many years now, including through having supplied customers with Noah products under private label.

Operator

Their electric actuator product portfolio is highly complementary to Road Talks, filling key product gaps for important target segments. They also have an asset light assembly and test model mirroring Roadtalk's, which will help to make a seamless integration. We welcome Noah to the Roadtalk family and estimate that the company will generate sales of million in the twelve months to December 2025 at a 20% EBITDA margin. In the medium term, we see the potential for significant sales synergies as we embed the company into our strategic sales initiatives. To summarize this previous slide, our target segment strategy is a key part of our Growth plus program.

Operator

Target segments are markets with big growth opportunities where we can be leaders with our superior products and services. Core segments, also important to Road Talk, are areas where we already lead and have a large installed base, which helps benefit Road Talk service. Both segments are driven by trends such as automation, electrification and digitalization. Since the Capital Markets Day in 2022, we've updated you on selected target segments with each results presentation. In the next slides, we'll look at critical HVAC within CPI and the Water segments.

Operator

Critical HVAC refers to heating, ventilation and air conditioning systems designed for environmental control where precise temperature and humidity is essential for health and safety as well as peak process performance. Applications include tunnel ventilation, semiconductor fabs and data centers. This segment grew mid teens in 2024 and now represents approximately 15% of CPI's total revenue.

Speaker 2

A

Operator

key area for the segment's growth comes from data center cooling applications, a high potential opportunity for the critical HMAC team within CPI. Modern data centers require more and more cooling, making this a very high growth market. Road Talk's main opportunity at present is outside the server room, where the average data center today can contain approximately 1,000 valves, which are on the piping network between the cooling towers and the server room. Many of these valves are high up in hard to reach places and have traditionally been manually actuated using chain wheel and gearbox combinations. Roadtalk supplies leading products for these applications.

Operator

Over the past recent years, there has been a clear trend to automate these valves, providing a better and more centralized control. This, similar to the methane initiative, is a key capability for Roadtalk, hence providing continued growth opportunities to build on an already successful target segment. The Noah product offering will also be a large boost in fulfilling the application requirements in this sector, one of the reasons why we are very excited to have them on board. Water is at the center of global sustainability efforts and Roadtalk is positioned to play a key role in enabling clean water access and climate change resilience. Rotor's Water and Power division targets all major sectors of the water economy, including water infrastructure, water and wastewater treatment and desalination.

Operator

Significant water infrastructure investments are underway worldwide to tackle climate related challenges. For example, The U. K. Plans to double its industry spend. In The U.

Operator

S, remote monitoring and control are expanding. China is increasing reuse capacity in water scarce cities and India is scaling potable water and wastewater projects. Tighter regulations and compliance standards are also increasing demand for advanced treatment and automation. Increases in energy requirements are driving growth in water demand and vice versa, with investment in desalination and reuse accelerating as part of the so called energy water nexus. Our growth plus strategy has significantly strengthened our water business and we are well positioned to capitalize on global water investments.

Operator

As a result, water now represents over two thirds of the division sales and has grown at a 13% CAGR over the last three years. We are very excited about the prospects of Road Talk service business, which we recently rebranded Road Talk service from Road Talk site services. The rebranding aligns with our full product lifecycle capabilities from field service, where we support our customers with on-site commissioning and maintenance upgrades, to our reliability services, where we look to sell additional maintenance and product care programs, increasing the frequency of service intervals to improve the efficiency, safety and reliability for our customers. Finally, we look to leverage our connected products through our intelligent asset management program to provide key insights for our customers to better run their plants. All of this is underpinned by our support service where we offer fast technical support and training to all our customers in relations to our products in application.

Operator

All these elements have helped to enhance our reputation in the market as having a leading service offering and has helped Rotor service to grow faster than the group in 2024. Going forward, we believe that our reliability and connected service programs can help to increase the revenue potential of a product from two times through our support and field service programs to four times over the fifteen to twenty year life of a product. This will help drive profitable and resilient growth over the coming years. Now turning to the market outlook, starting with Oil and Gas. In 2025, we expect the Oil and Gas industry to continue to invest to increase output, to drive productivity, to electrify operations and to provide energy security to an unsettled world.

Operator

Downstream markets were strong in 2024 and we expect these to remain so, driven by refinery starts and maintenance activity. We continue to see good momentum in upstream and midstream electrification with customers committing to electric actuation having experienced the benefits. The outlook for LNG market is also positive with the liquefaction industry having very ambitious expansion plans. Overall, while still mindful of macro and geopolitical uncertainties, we consider the outlook for the Oil and Gas division to be positive. Moving to CPI, we see the critical HVAC market having a positive outlook driven by structurally growing markets such as tunnel ventilation and data centers.

Operator

Similarly, we see a positive outlook for specialty chemicals, mining and marine markets. We continue to believe that CPI has plenty of opportunities to win share in its target segment and also in particular, markets where it's historically been underrepresented. And last, but 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 challenges and potable water shortages. Efficiency and digitalization remain key focus areas.

Operator

The UK Water sector is transitioning to AMP eight, which is expected to include a significant increase in investment in the years ahead. The Power segment within Water and Power saw good growth in 2024. The outlook for the conventional power market is more positive than it has been for some time. This improved outlook is driven by an increase in energy demand whilst at the same time providing energy security. In other power markets, we see good prospects for emissions related spend, including carbon capture usage and storage and for renewables such as offshore wind platforms.

Operator

In summary, I'm pleased to report a strong set of results for 2024 and that the growth plus strategy is on track and delivering our vision. We aimed for mid to high single digit revenue growth and have delivered a ten percent three year organic sales CAGR, including having exited Russia. We aimed for a mid-20s adjusted operating profit margin and have delivered 23.6% in 2024, our highest margin in a decade, including having invested in our commercial teams. We are generating very high returns amongst the highest of our peers, benefiting from our competitive streams and high barriers to entry. We have continued our capital allocation activity, agreed to acquire a very complementary electric actuator business in Noah, and today announced another share buyback, the third in recent years.

Operator

We remain active and disciplined in seeking further bolt ons and if these don't materialize, we will look to return cash to shareholders. I'll finish with the outlook for 2025. Three years into the Growth plus program, we remain confident of delivering our financial ambition of mid to high single digit revenue growth and mid-20s adjusted operating margin over time. We have entered 2025 with confidence and expect a year of progress on an OCC basis. Thank you again for your interest in Road Talk.

Operator

We'll now open the lines for your questions.

Speaker 3

Our first question this morning comes from Andrew Douglas at Jefferies. Andrew, please go ahead. Your line is open.

Speaker 4

Good morning, gents. Thank you for the presentation. I've got the obligatory three or four questions. Can we just talk very quickly about Oil and Gas? Clearly, you had a good year.

Speaker 4

Have we started to see LNG orders come through yet? Or is that still to come? And I think one of the challenges we had last year, or at least the start of the year, was a lack of big projects. Is that now changing? Or is this momentum in the business kind of a function of, do you just winning share or just lots of small projects?

Speaker 4

Where are we on that kind of big project look? And that's the first question. Second question for Ben is on the ERP cost takes a bit of a shoot up from 17 to 30. Can you explain what exactly is going on with that rise? And are we in kind of critical phase in terms of the amount of activity that's taking place in the current year?

Speaker 4

And then last but not least, in terms of the M and A pipeline, looks like you've got some, I think you said bolt ons at the end of your speech, Greg. How is that pipeline quality, size and competition, please?

Operator

Yes. Thanks, Andy. Good to see you. Thanks for the questions. If I take the LNG and the big projects questions, I'll hand to Ben for the ERP, and I'll take the M and A pipeline.

Operator

So in terms of LNG, we are starting to see the LNG orders. That's coming through. We've always said that we would start to see the LNG orders coming in at the beginning of twenty twenty five, and that is coming true. If you look at the valve makers, they are receiving their orders. I think valve maker lead times are between eighteen to twenty four months.

Operator

Our lead times for electrics depending on variations is six to twelve weeks. And then for fluid power products, let's say between twelve and twenty weeks depending on the complexity. So as the valve makers receive their orders, we wouldn't see them for potentially six months to a year. But we are seeing those projects coming through. So that's positive.

Operator

In terms of large projects, last year, large projects came back to normal. I think we said that there was a spike in H1 of twenty twenty three, where the large orders were double. In the H2 of 'twenty three, that went back to normal. And then through 'twenty four, that was also at a normal rate. In saying that, in the H2 of 'twenty four, whilst we had the normal rates of large project orders, Q4 did see a larger weighting.

Operator

So those larger projects came in the Q4, not the Q3. So that's where we are. I'll hand over to Ben for Yes.

Speaker 1

I was just going to add also, Andy, just on the LNG. I mean, orders year on year up 10% as well, so just a bit of context there. Just in terms of the ERP, at the end of last year, we spent million. As we said in the results today, we spent another million this year, which takes us up to million. We anticipate there's going to be another million to million to be spent to actually finish the program by 2027.

Speaker 1

Since I've come in, in March, I've taken a fresh look at the ERP implementation. I think we are taking a different approach. We are bringing in some more external expertise to really, I think, give us a lot more continuity around the program and especially around the technical aspects of how we're going to deliver that. But again, I think that actually derisks the program as well. I think we've got a lot more certainty over the delivery time line and on the budget.

Operator

And then, look, returning to M and A and the M and A pipeline, I would say our M and A pipeline is strong. We have a number of actionable opportunities. But at the end of the day, it all comes down to financial disciplines and our financial hurdles. So whilst companies may strategically be right for us, if they don't fit our financial hurdles, we wouldn't look to pursue them. Pipelite, Noah is a fantastic acquisition for us.

Operator

It's absolutely right down the fairway in terms of product enhancement, size. And so we have a number of opportunities similar to Noah in our pipeline. We typically look for privately owned companies where we build relationships over time. Then we look time these time these M and As. We've been courting Noah for at least five years now.

Speaker 2

Sorry to just go back on your question, but I couldn't

Speaker 4

hear it because Jonathan Herns typing

Speaker 2

and making lots of noise. But

Speaker 4

is your ERP system finishing by 'twenty seven, you say?

Speaker 1

The end of 'twenty seven, yes.

Speaker 2

And 'twenty seven, perfect. Thanks very much. Thanks, Andy.

Speaker 3

The next question comes from Stefan Klepp at HSBC.

Speaker 5

I have two. First one is a little bit more multifaceted. So the order momentum picked up in HQ and actually in the last two months quite significantly. I mean, we had zero organic in the first half, eight in the first four months. So actually to get to six for the full year like 15% to 20% organic order growth.

Speaker 5

So can you explain the momentum there? I mean, well done. I would like to see that. Can you explain that? And how that has been performing as well into the start of 2025?

Speaker 5

And having said that, going back as well a little bit to Andy's question, where is Oil and Gas? Is it top ish at the moment in terms of demand? And when we talk about that, where's Water and Power sitting in terms of the investment cycle? And then one for Ben. So what is the right level of net cash going forward?

Speaker 5

Or actually, what's the right level of maybe even net debt? Or what would be a level that you going forward will be comfortable with?

Operator

Stefan, thanks for the questions. I'll take the order ones and then I'll hand over. So if you look back to H1 of twenty twenty three, like I said, we had a number of large orders double the size as normal. So H1 'twenty three was tough comps, let's say. So H1 'twenty four matched that with half the amount of large orders.

Operator

So really, really, really good progress for us. And then momentum carried on into H2 of twenty twenty four. And that's where you saw that acceleration year on year. The growth came from all divisions led by Oil and Gas and Water and Power, but CPI also came through and grew in the second half. So full year, all divisions were ahead on orders on prior year.

Operator

So really, really pleased with that performance. In terms of 2025, look, we entered the year with good momentum. It's early days. It's only been two months, but we're pleased with the start of it. And as I said in the presentation, the outlook for us for our key markets is positive, notwithstanding all of the macro and geopolitical uncertainties that are going on at this minute.

Operator

In terms of Oil and Gas, like I said in the outlook, we still believe that there's good investment into Oil and Gas. Over the last few months, you've seen a number of oil majors come out to say that they will continue spend in Oil and Gas. And that is positive for us. So we see still good momentum going forwards in the short, medium and long term. Water, as you've seen, has been excellent, growing 13% CAGR over the last three years.

Operator

There is continued investment, and it's actually continued investment across the globe in all regions, which is really positive for us. And with our global presence, we are set up to be able to execute on those trends. I mean, to give you an example, The UK is entering into the next investment cycle, it's called AMP eight. And the slated numbers for that investment cycle over the next five years is 104,000,000,000, up from 56,000,000,000 in AMP seven. So that gives you an idea in terms of the quantum, in terms of the investment going into water infrastructure.

Operator

And so we're very confident with water as well. Do you want to take the cash one?

Speaker 1

Yes, yes. So Steph, I think we've always been consistent in terms of we would like to do more M and A to really complement the organic growth we've got coming through. As Gigs said, a lot of the assets that we're currently tracking do take some time to convert, particularly because they are family owned businesses. As we've announced today, we've done the acquisition. But in addition to that, we are doing a share buyback program.

Speaker 1

And again, I think we've been consistent in saying that if we don't have any visibility to any significant M and A going forward, we will continue to return the cash back to shareholders.

Speaker 5

Well, that is clear. I was rather thinking like is there a change in your approach to the balance sheet? And I mean, I think you have been saying in the past that if you find the right target, that's more expensive. You are very comfortable with going as well into the leverage situation. But I'm rather thinking if you don't find that and your cash generation is magnificent in the sector, I have to say.

Speaker 5

So what should we then think about the share buyback component? Or should we even consider that you're not going to be at net cash at some point in time because cash generation is probably the main feature that you consistently have been delivering on?

Speaker 1

Yes. So I think you're right. I think for the right asset, absolutely, we'd go into a net leverage position. But at this point in time, again, the balance sheet just gives us strategic flexibility to do that. The OSC is actually we don't aim for a net cash position.

Speaker 1

Over time, I think you'll see it comes to more of a neutral position on the balance sheet. But as you say, we do generate a huge amount of cash. So even if we do take on the leverage, we deleverage very quickly.

Speaker 3

The next question comes from Mark Davies Jones at Stifel.

Speaker 6

Thank you very much. At the risk of sounding like Andy Douglas, can I do three, please? First one was, you said Noah fills some specific product gaps, capability gaps that Roche will conspire internally. Can you just give us some color on where those are? Secondly, just coming back to Oil and Gas on the slightly more specific angle, I keep being asked what happens if we do get some sort of peace settlement in Ukraine, Russia is back in the global economy.

Speaker 6

Does that take some of the pressure off some of these alternative investments to find alternative sources of supply? And then thirdly, perhaps for Ben, you mentioned, I think, in the CPI commentary some mix effects on the margin there. There's also a big spike in margins at Water and Power, which looks like it's more volume related. But can you just talk about any specific mix issues within margins and anything that might look a bit different going into 'twenty five? Yes.

Operator

If I take Noah, so Noah is straight down the fairway as we can get for Rotor. We're really excited about the acquisition. And what it gives us is portfolio enhancement. So if you think about current Rotor products, they go on valves, let's say, about 12 inches or bigger and require higher torques. We two years ago, we bought handbait.

Operator

So handbait goes on smaller valves, let's say, between one or two inches. So there's a gap in the middle. And the Noah product fills that gap in the middle, products that we don't have and where the IQ product, for example, is too big for us. Now in the past, let's say, the smaller valves and the medium sized valves were more actuated with pneumatics or manual. But with the growing electrification trend, these are turning more into electric.

Operator

And so that's why we actually ended up private labeling NOAH because our customers were asking, do we have an electric actuator in this size? We didn't. So we private labeled NOAA products. And then in the end, we built our relationship and the right thing was obviously to for NOAA to join Rotor. So that's where that fits.

Operator

It gives us huge leverage in key markets, so water and power, CPI and up and midstream electrification in oil and gas. We see this product as hugely kind of complementary for our growth within these markets. In terms of Oil and Gas and the piece in Russia, Ukraine, I think overall, it could be net positive, but it's early days obviously. You've obviously got a lot of infrastructure damage within these countries. We would expect potential opportunities, let's say, in refurbishing, rebuilding refineries, pipelines and things like that.

Operator

So actually, potentially, it could be opportunities for us. But it's early days and I wouldn't like to kind of guess on what comes through. But we don't see that too much as a kind of tailwind in terms of our growth developments.

Speaker 7

Do you

Speaker 4

want to

Speaker 2

take the mix on

Speaker 1

the CPR? Yes. Just on the margins, Mark. In terms of CPR, you'll recall last year, we had quite a significant number of orders for nickel projects in Indonesia. Again, they were at lower margins than what we would normally expect.

Speaker 1

So therefore, you have a non repeat of that coming through in 2024. So that's on the CPI side. In terms of Water and Power, again, back up at 29%. If you go back to sort of 'nineteen, 'twenty, that's sort of the margins that Water and Power consistently had. So again, it's kind of just going back to normal historical levels.

Speaker 1

There's nothing unusual there.

Speaker 3

The next question comes from Lush Mahendra Raja at JPMorgan.

Speaker 2

I've got three questions as well, if that's okay. The first is just on Noah. I guess, can you just give us some color on, I guess, how the revenue splits between the three divisions, is it aligned with the rest of the group or is there a higher mix to any? And just on that, on there as well, I guess, the margin is very good, but I guess it's a touch below your sort of very high group margins. Do you think that can get in line with group margins in time?

Speaker 2

That's question one. Question two is, I guess, going back to that mix point, I think price mix by healthy tailwind in the 2024 EBIT bridge. Just looking at your order book today, how do you see that developing for 2025? And then the third question is just on CPI, just something you said at the end in terms of an opportunity to win market share in target segments while you are historically underrepresented. Can you just remind us what your market share is within CPI and how that compares to the other two divisions?

Operator

Yes. Okay. Let me take the Noah one. So the Noah products will go into all end markets because the applications are, let's say, quite similar in terms of valve actuation. However, we see NOAA really complementing water and power and CPI, I would say.

Operator

I've given you an example today of potential automation within data center pipelines. So that would be fantastic opportunity for Noah. And that gives you an example in CPI critical HVAC. In water examples and in water applications, especially in China, in India, it will be key for us to grow. And we see actually opportunities in upstream and midstream electrification for oil and gas.

Operator

So probably weighted more towards Water and Power and CPI, but still good opportunities in the electrification initiatives in oil and gas for us. If I just take the market share one for CPI and then I'll hand it over to Ben. Market share for CPI is quite difficult just because of such a broad range of business that CPI is in. So if I give you some examples, critical HVAC, for example, we've actually got good share in terms of critical HVAC. But you can see that the applications are so varied within the need for critical HVAC.

Operator

So we're unearthing new opportunities such as the electrification trend in data centers. So that's how we look for new markets where the technology is changing. We've got the right products to solve the customers' problems or give them what they need for their opportunities. And that's how we grow CPI. But it's very hard to give a market share because it's such diverse broad range of markets.

Operator

But we do have strong products. So what I would say is our products are always leading in these applications, hence, our ability to be able to develop these new markets. Do you want to take the mix question?

Speaker 1

Yes. So without giving, I suppose, a specific mix in the order book going forward, Lush, but I think what I will say is what you've seen over the last couple of years, and again, what we've consistently said is you will see as there is a general move to more electric actuators, obviously, the margin is accretive to the overall group. And again, in 2024, that moved by, let's just say, a couple of hundred basis points towards electric away from fluid, power and gears. So again, just over time, you will just naturally see margin accretion because the mix just moves towards electric.

Speaker 2

And can I just go back on another, please, just on the margin? Sorry, can that get to sort of group margin?

Operator

Sorry, yes, I missed that one. Okay. Yes, in terms of margins, look, it's quite hard to find opportunities where margins are naturally instantly accretive to Rotor because we do have market leading margins. So, what we look at is for companies with margins similar to TENOA in the 20s where we can look to then leverage our operations, our lean methodologies, our manufacturing skills, and then we can increase the margins. So, I have no worries that we can in time make NOA become accretive to our margins.

Operator

That's not something we're worried about.

Speaker 3

The next question comes from Dylan Jones at Kepler Cheuvreux. Dylan, please go ahead.

Speaker 7

Good morning, gents. I have a few as well. Sorry, I dropped out temporarily there. So apologies if these have been asked. But firstly, just on the organic growth rate in Road Talk Services, I mean, you've given the sort of three year CAGR there of around 14%.

Speaker 7

Are Are you able to provide any sort of sense? Is that accelerating? Is it sort of remaining sort of consistently above the sort of group average there? And just trying to get a sense, I suppose, how important that is for the sort of mid to high single digit organic growth target that you have for the group over the medium term?

Operator

Yes. So good question. So service for us is a key driver for growth. And our strategy in the various elements of that slide that I show today is to essentially increase the intervals of servicing and then increase the spends per service visit. Now the value proposition for our customers is that we are helping them give a more reliable, efficient process, for example, help prevent unplanned downtime.

Operator

So service is a key element of our growth strategy. And what we look to do is we look to grow service above the group and we have done for the last three years. So you can see the three year CAGR for the group is ten percent and the three year CAGR for service is 14%. So that's really our strategy for service to leverage our strategy to grow faster than the group.

Speaker 1

Got it. And on the sort

Speaker 7

of target segment, you obviously outlined the critical Haystack, and I think it was specifically in relation to data centers, but the sort of expected CAGR there and you kind of pointed to the low automated penetration. So the question is, I suppose, have you undertaken any other work sort of across your end markets or the target end markets to the level of automated sort of penetration there and sort of any sort of updated sort of commentary you can provide on the sense on that sort of trajectory and the speed of adoption?

Operator

Yes. That's also a very hard one. Obviously, there is a broader trend of electrification and automation. I mean, and it really differs sector on sector. So the example we gave today in the data center sector is between the cooling towers in the data center and the server rooms, there's about 1,000 valves.

Operator

Currently, 95% of them are manually operated. However, there is a growing trend to electrify those valves. The rate of electrification is something that we can't really get and there's no real market data. That's just really understanding customers, understanding their direction. But also, it's about us selling the value proposition of having electric actuators over and above manual ones.

Operator

So but that is where we are looking for pockets of growth where we can really accelerate the growth. So I can't answer you on a broad brush because there isn't one. So but that is where we are looking so our competition is actually against different types of valves. So, Noah provide leading product for, let's say, spring returned electric actuation in this valve space. And so we believe with the specifications that Noah has, we can really give the customers what they need in terms of control.

Operator

And that's how we will look to drive the value proposition to grow the company. We obviously haven't given forward projections in terms of growth, but we look to grow in line with our financial ambitions.

Speaker 7

Can I just ask that?

Speaker 8

I mean, what

Speaker 1

I would add to that is, I mean, if you look at the ten year plan of Noah before we bought it, I mean, their organic growth is 6% CAGR over the last ten years. So I think we're very confident that we can build on that 6% CAGR given further comments that Guy just said, taking their product for our sales channels. I think there's a lot to do there.

Speaker 7

Great. Thanks a lot, James. I'll leave it there.

Speaker 3

The next question this morning comes from Alex Virgo at Bank of America.

Speaker 8

Can hear me okay. It's just a follow-up really on business transformation costs. So you've increased those by $15,000,000 to $20,000,000 at the extreme edges of those ranges. And your comments, Ben, on taking a new look and thinking about bringing in external expertise, which gives you better certainty on timeline and budget, I think you said. I just want to understand what the increase is.

Speaker 8

And as we model that over the next three years, I guess, to 2027 it being done, is that a sort of a thirty, twenty, 15 type trajectory? And then if you could just give us a sense on the actual cash flow profile as well, given those, I guess, those are sort of P and L numbers. And then just on that point, the final one, you've done you've been doing it for a couple of years now and we've had no hiccups, which is good and unusual for any RP implementation. So I'm just sort of double checking that as you look at the next two to three years as the bigger chunks of that spending come through, what are you putting in place or what do you have in place to make sure that we get this done without any further hiccups?

Speaker 1

Yes. So I think I've got all those questions. But if I miss anything, just remind me, okay? So I think first and foremost, in terms of what is the majority of the increase in the cost, it is very much the fact that we are bringing in external expertise, which as you know, when you work with professional services firms, there is an increased cost to that. But for us, we think again, I think we've been very consistent.

Speaker 1

It's not about how much it takes to implement an ERP system. Clearly, it's got to be within some boundaries, but it's just whether it's done well or not. And I take your comments the fact that we've already done a couple of sites, it's gone very well. So that's where the really the increased cost is rather than an increase in time. In terms of the profile, million this year, again, that will tail off roughly as you said, yes, we're going to have million, probably million and then at million in 2027.

Speaker 1

And pretty much the cash follows pretty much the same as the P and L.

Speaker 8

Very helpful. Yes. Thank you.

Operator

If I can just add as well, in terms of the implementation, we went live with our bar site, and our bar site is our biggest and most complex site. So, we went live in 2023, as you said, with no hiccups. We've just gone live in our Germany site. So, actually, we're pretty confident as we go forward, the sites to go on are actually smaller, less complex sites.

Speaker 3

The next question this morning comes from Jonathan Hoehn at Barclays.

Speaker 9

Just a few questions for me, please. Firstly, just in terms of sort of future opportunities for Rotor. Can you just sort of talk a little bit about what you see as the revenue opportunity from that sort of midstream electrification? And also just in terms of Oil and Gas, obviously, Trump's come in, he's putting out of the Climate Agreement. How do you think that could impact at all in terms of North American methane reduction?

Speaker 9

That was the first one. The second one was just in terms of your digital strategy going forward. Obviously, big focus on that push for Road Talk in terms of your offering. Can you just sort of break out a little bit just in terms of the growth rates you're seeing within that sort of digital offering? And then thirdly, finally, just in terms of China, obviously, new factories open there.

Speaker 9

Can Can you just sort of talk us through what that's going to serve, what the implications are? And is it more efficient? Is it going to be beneficial to the margin there going forward, please?

Operator

Yes. Okay. Good morning, Jonathan. Hope you can hear us as Andy types as well over the top of you. So, I think for the future, let's take the methane example.

Operator

We don't anticipate a slowdown in the methane initiative going forward. I think where we are at the moment is that a lot of the operators, they have transitioned quite a few to electric. They've seen the benefits now of the electric actuation. And so this now comes more towards operational efficiencies. And so we see that continuing.

Operator

So actually, we're not so concerned about the methane initiatives dropping. At the same time, we are looking at other electrification opportunities in upstream. And we talked about at the half year last year where we are working, or we had worked with an operator to produce the first all electric fracking. That opportunity continues and they're looking to make more. So actually, we see the trends in upstream is to electrify and that is only positive for Road Talk.

Operator

In terms of the midstream, again, we haven't put a number out there yet because it's early days. But also, operators are looking to electrify the midstream just as they are in the upstream. Stream. So that's additional market opportunities for us. So on the whole, we do see that as positive, more towards really the electrification trend as well as reducing methane.

Operator

In terms of our digital strategy, I think we haven't measured exactly the increase in revenue due to the digital applications that we put in. They are more enablers to the growth. So for example, last year, we launched the first integrated Ethernet. That works in conjunction with our Intelligent Asset Management, I'm program. Now, the service team really look to leverage that, so that we can give customers up to date data onto their operations.

Operator

And what that drives is us really helping our customers plan their maintenance where they would have had an unplanned breakdown. We could service the products ahead of time to stop that. And I think all of that you can see is helping Road Talk service deliver the growth that you've seen in terms of the 14% CAGR ahead of the group. So we see the digital strategy as really a platform for us to really drive the growth. And then in terms of the China factory, the China factory is a relocation of our existing factory where we built our factory before, where it was in an industrial state in Shanghai, Shanghai grows at such a rate it was zoned as now a residential.

Operator

So we took the opportunity to mitigate the risks and we built a new factory. The factory serves China predominantly, but it can also serve Asia Pacific countries as well. We also took the opportunity when we build our China facility to achieve LEED gold accreditation. So that factory is predominantly running on clean electric as well.

Speaker 3

This concludes the Q and A session. And I would now like to hand back to Georg for any closing remarks.

Operator

Yes, thank you. So thank you, everyone, for dialing in. Thank you for your interest. Before we end the call, I would just like to summarize. Rotor has had a very strong year in 2024.

Operator

The growth plus strategy is delivering on our financial ambitions, and I'm really proud of what the team has achieved so far. The target segment and the RoadTalk service is helping to deliver structural growth for us. And then we continue to execute against our capital allocation policy with the acquisition of Noah and announcement of another share buyback. So finally, we enter 2025 with confidence. Thank you, everyone, for your time.

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Earnings Conference Call
Rotork H2 2024
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