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Rotork is a market-leading global provider of mission-critical intelligent flow control and instrumentation solutions for Oil & Gas, Water and Wastewater, Power, Chemical process and Industrial applications. Its shares have a premium listing on the London Stock Exchange (symbol: ROR), have a market cap of £2.8bn and are a constituent of the FTSE 250 index.
We were delighted to welcome CEO Kiet Huynh and Andrew Carter, Director of Investor Relations, to the latest Yellowstone Advisory webinar to present the full year 2022 results. A recording of the webinar is available here.
CEO Kiet Huynh has been in the job a year and it’s been a busy and exciting year spent visiting sites, meeting colleagues, customers and investors. Kiet reported he is genuinely excited to be leading a first-class engineering company. A point reinforced by customers who talk about Rotork as a fantastic brand with leading products and high levels of site service.
Return on sales and return on capital employed is high and well understood by investors but stronger growth going forward is a key imperative for investors. Hence the launch of the Growth+ strategy. It is clear too that playing a key role in emissions reduction and decarbonisation as part of a broader energy transition is very important to Kiet and Rotork. This absolutely fits into how they view their purpose, “Keeping the world flowing for future generations”, and their values of: stronger together, always innovating and being a trusted partner, whilst tackling the sustainability issues of our time.
In terms of the FY 22 results the company experienced an improving revenue trend through the year and into the second half and stronger performance from Oil & Gas and Chemical, Process & Industrial compared to Water and Power. The following areas of strong performance were highlighted : revenues grew 8.4% OCC, operating margins came in at 22.3%, ROCE improved to 31.3% and after cash conversion of 76% the company ended the year with net cash of £106M. Cash conversion was below the previous years due to phasing of revenues at the back end of 2022 and it also reflected an increase in working capital as more inventory was built up to address the supply chain issues. Two non-financial measures were also highlighted. The company is proud of their 17% reduction in carbon emissions and for being mentioned in the S&P Global sustainability yearbook in the top 5% of their peers.
Order intake improved across all divisions and momentum was particularly encouraging in the fourth quarter, ending the year up 11%. Supply chain issues eased through the year. Revenues grew 12.8% from all end markets and all geographies with two thirds of this growth coming from price and one third from volume. The Americas was the fastest growing geography and CPI the fastest growing division. Full year margins were slightly weaker reflecting a softer first half. The company announced total dividends for the year of 6.7p which are covered 1.9x from earnings.
The Growth Acceleration Programme which has been running for 5 years, and is being replaced by the Growth + plan, has made progress in a number of areas. Notable achievements include the 200bps improvement in EBITA margin, the reduction in the footprint of 15 facilities to 16 at the end and overall helping to improve profits by £30m and cash generation by £33m which has covered the investment in the ERP program.
The Oil & Gas division improved both margins and sales despite withdrawing from Russia and experienced good momentum through the year. Revenues rose 8.9% to £283.3m and adjusted operating profit rose 13.5% to £64m. The Americas region has been particularly strong driven by the upstream sector and the outlook is good. Methane emissions reduction work was also particularly buoyant.
The Chemical, Process & Industrial division is now the groups second largest division and reported the strongest growth but margins declined by 90bps. Margins were impacted by higher component costs and a higher share of central overheads. There have been particular successes in a number of niche markets like semiconductors, data-centres and battery material processing. Overall revenues rose 23.6% to £198.4m and adjusted operating profit rose 19.7% to £51.2m. Sales were particularly strong in process industry and the mining sector.
The Water & Power division saw the most significant supply chain disruption and this impacted first half revenues. Some of this was caught up in the second half of the year which showed 40% sequential growth. A large proportion of sales are of electric actuators and they experienced the biggest issues with semiconductor procurement. Margins fell 200bps impacted by higher priced electronics components. Revenues rose 7.8% to £160.2m and adjusted operating profit fell marginally to £40.3m.
Summarising the financial performance, the company emphasised the record order book going into 2023, on the back of record order books as they entered 2022, and having good momentum. Supply chain challenges remain but have stabilised and inflation, whilst present, is more of an issue in rising people costs than rising material costs. The company has good pricing power and raised prices twice in 2022 and has raised prices again in 2023 to cover increased cost.
Kiet then spent some time talking through the Growth+ strategy and set the context by referencing the November 2022 Capital Markets Day (all materials are available on the Rotork website). The Growth+ strategy is designed to deliver growth through a focus on: target segments, customer value and innovation. Rotork has great products that are ideally suited to the megatrends of automation, electrification and digitalisation and will all drive growth. Further sustainability provides great opportunities for the company and through Rotork Site Services they believe they have a differentiated offering for customers. The ambition remains to deliver mid to high single digit revenue growth and mid 20’s adjusted operating margins over time.
Target segments within each of the three main divisions have been identified which have significant growth opportunities and have significant size. Oil & Gas is estimated at £1500m with high single digit market growth, CPI is estimated at £800m with low double-digit market growth and Water & Power is estimated at £1,400m with mid to high single-digit market growth. These target segments represent around 50% of group revenues in 2022. Some examples were then given for the target segments. The inflation reduction act in the US is driving methane emission reduction where pneumatic valves which vent methane into the atmosphere are being replaced by electric valves from Rotork. Rotork electric actuators have also been used in Carbon Capture Usage and Storage at Northern Lights, which is Europe’s first opensource carbon capture project. In wastewater treatment Rotork has sold to a major project in Singapore for the national water agency which converts dirty water to clean water so that it can be reused. Rotork actuators and Rotork site services collaborated to win this project.
The customer value pillar seeks to ensure the customer is at the forefront of everything Rotork does. To go along with market leading products they want market leading service as well. Improving customer value was highlighted in two areas where Rotork has worked to reduce customer lead times from 16 weeks to 2 weeks and reengineering of business processes to reduce quote times to customers.
Innovation is the third pillar and the lifeblood of Rotork. Innovation is a key part of the Growth+ strategy and is linked to the megatrends of automation and electrification and aligned with the target segments. In 2022 electronic circuitry had to be reengineered to manage the supply chain issues but despite this the group still manged to launch 5 new products.
Kiet also highlighted the Eco-transition portfolio which is made up of three pillars: water & wastewater; methane emissions reduction; new energies & technology. The Eco-transition portfolio delivers products and services that drive clear sustainability benefits and now accounts for 30% of total sales and is growing at 10%.
Turning to the backdrop to the markets that Rotork operates in there are positive signals across all their markets. In Oil & Gas there has been a return of investment in production and Rotork believes this will continue pointing towards a positive outlook. Lifting of Covid restrictions in China is also believed to help the overall market growth. In CPI there is increased activity in decarbonisation, whilst chemical, HVAC and mining provide positive market dynamics. Finally in Water & Power there is increased water infrastructure investment going on in all regions and again the lifting of Covid restrictions in China is providing further support to growth.
In summary Rotork is a first-class engineering company with market leading products. The group performed well in 2022, growing volumes and pushing through price rises and successfully navigating the supply chain disruptions that impacted the year. They ended the year with a record order backlog after good performance in Q4 and expect a year of further progress in 2023. There are good early signs that the Growth+ strategy is delivering growth. The company continues to target mid to high single digit revenue growth and mid 20’s adjusted operating profit margins over time. Management appeared upbeat and optimistic about the future and are looking forward to further success.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com