Earnings Call: H2 2019

Mar 3, 2020

Good morning, everyone. I appreciate you joining us as we discuss our 2019 full year operating results. I'd also like to welcome those joining us via Webex. Thank joined here today by Jonathan Davis, our group finance director, as well as Martin Lamb, our chairman, and Andrew Carter, our Investor Relations Director, We'll follow our usual format for today. I'll begin with highlights from 2019, then Jonathan will take us through our financials in a bit more I'll then return and discuss our markets. I'll say a few words about our views on the coronavirus, and we'll then discuss the progress making on a growth acceleration program. We'll finish with a few words regarding our outlook for 2020. As I reflect on the progress 2019, I'd like to take a moment to thank the 3700 Rotor team members that did an outstanding job in remaining on execution of those things within our control. Despite an unhelpful macroeconomic backdrop that became even more uncertain as the year progressed. 2 years into our growth acceleration program, we have laid the foundation that drives our future growth, and we have successfully initiated our operational transformation. Our endeavors in becoming easier to do business with, reorienting, customer facing teams, and accelerating our innovation and new product development are taking shape. In pursuit of increasing our cyclical resilience, our efforts in lean manufacturing globalizing our supply chain and business simplification in terms of both facilities and product line rationalizations. And our keen focus on productivity are yielding tangible benefits. We've strengthened our leadership team and created our 1 road work movement, emphasizing bringing our company together under our revised purpose of keeping the world flowing for future generations. We've launched our new values and behaviors, and we've now allow aligned our rewards programs to these desired behaviors. Our next generation IT platform, which yields additional future benefits, is well underway with elements being deployed this quarter ahead of the implementation in late 2020 or early 2021. Let's take a look at our highlights for 2019. Against demanding comparison period. And in an unhelpful macroeconomic environment, an absent orders and revenues from sanctioned countries Our full year order intake was up 1 a half percent on a reported basis and revenues declined 3.8%. The team's continued execution is evidenced on a decline in revenues to land at 22.6 percent. Strong cash conversion of 131 percent with period ending net cash £106,000,000. This level of cash generation continues to demonstrate our ability to self fund our growth acceleration program. And a 260 basis point increase in return on capital employed to end at almost 32%. Our investments in road torque site services, which largely represents our recurring aftermarket are bearing fruit. And while these revenues continue to be reported within existing business segments, I'm pleased to services business grew in 2019 to achieve 20 percent of group revenues. Once again, a strong outcome despite the macroeconomic environment, demonstrating our team's continued ability to drive day to day execution, whilst implementing the initiatives identified through our growth program. Now let's have Jonathan walk us through our detailed full year financial results. Thank you, Kevin, and good morning, everybody. We're pleased report another year of progress with operating margins use revenue. Organic constant currency or OCC results are adjusted to restate the 2019 results at 2018 rates and for the 2018 disposals. Currency was a circa 1% headwind tailwind for the year as a whole just as it was in the first half of year. The businesses disposed the half of last year and reversed the small first half shortfall. For the year as a whole, order intake was 0.7% ahead on an OCC basis. The order book is 12.6% higher than last December with a book to bill of 1.03 for the year. Revenue was 1,000,000, 4.4 percent lower adjusted operating profit of 1,000,000 grew 2.2% and margins on an OCC basis were 140 basis points higher than 2018. On a reported basis, adjusted operating margins were 22.6 percent. Adjusted earnings per share were 13p@2.4 percent increase. Cash conversion was 131 percent, reflecting a very positive working capital performance. And the This adjusted operating profit by material cost savings and lower costs as we see pleasing momentum from the growth acceleration program. Incremental growth acceleration program savings were 1,000,000 under within all three headings. I'll provide more detail on this percent. Lower material costs were the largest contributor improving 210 basis points. A third of this is due to divisional mix and the remainder due to management actions. Overheads reduced 1000000 or with the balance spread over many cost headings. As a result, adjusted operating margins increased 160 basis points to 22.6%. Overall, headcount reduced 4.7% in the period. This includes the sites we've closed in the year productivity improvements across many locations and rebalancing resources geographically. Adjusted operating profit per head increased and focus areas in disciplines. We started year with net cash of 1,000,000, but the introduction of IFRS 16 on leases reduced this by in net cash of 1,000,000 cash conversion in the period was 131%. Working capital in the cash flow, which uses average exchange rates, was a million inflow with inventory and receivables both positive. Net working capital as a percentage of sales fell from 1,000,000 and reported as days sales outstanding, this is a reduction from 62 days to 57 days. CapEx was 1,000,000 as we an increase in IT investment but no major spend on facilities in the year. Investment in Rochester has started but will impact 2020 Return on capital employed increased 260 basis points over the last 12 months to 31.8% driven by both the increased profitability and reduced asset base. This means that over the last 2 years, return on capital employed has increased 690 basis points. And as the calculations use an average asset base, the full benefit of the December 'nineteen balance sheet is partly reflected. The million adjustments to profit in the period comprise redundant and restructuring costs less the million profit on the sale of the remaining parts of the Pittsburgh business. The distribution business was sold right at the end of December 2019 for 1,000,000. The site improvement cost of 1,000,000, largely relate to the 2 manufacturing sites we closed and relocated in the year in Tawton and Tulsa. The payback on these opportunities in new spend categories. The impact of the numerous continuous improvement initiatives has been a million gain in 2019. These benefits are retained as we move into the current year, but only incremental benefits are captured in this summary. The cost of reorientating the sales organization and divisional structure has been 1,000,000 in the year. The savings arising from this and the actions in the previous are an incremental million P and L benefits in 2019. The total income statement impact over the 1st 2 years of growth acceleration program is 1,000,000 and exceeds the cumulative 1,000,000 restructuring costs in respect of the program. When the cash benefits of working capital improvements measured here against the 2017 start point added, the cumulative cash generation of 1,000,000 exceeds the 1,000,000 spend to date on investment in facilities and IT under the growth acceleration program. Looking 2020, let me provide some guidance on key points. Incremental growth acceleration program benefits are us to be lower in 2020 than 2019 with lean initiatives, the one area of increased incremental benefit. Site improvement benefits are expected to be lower in 2020 as we prepare a number of sites for future initiatives. Procurement savings are lower as the team moves to the next wave of categories. Lean initiatives are now an ongoing activity and will gain traction in 2020. The organization changes arising from the Salesforce reorganization were largely complete in 2019. The next phase of these savings will come following implementation of the new IT platform later in the growth acceleration program. Although currency was a 1% tailwind in 2019, Based on the current rates prevailing for the rest of the year, currency would swing to a 2.5% to 3% headwind. The Pittsburgh business we sold in December be excluded from 2020 forecasts. In 2019, it recorded sales of 1,000,000 and profit of 1,000,000. The effective tax rate 5%. There are no significant drivers of this reduction, but it's influenced by the geographic mix of profits plus tax markets. This is current not currently expected to change as we look at the coming year. We'll see increase in some people costs compared with 2019, particularly in R&D And IT as these areas accelerate activity in 2020. The U. S. China tariffs impacted gears division in 2019 with incremental costs of 1,000,000. However, based on the position, there is still a small incremental cost in 2020 of around and this together with investment in our Rochester, New York State Factory will be the main drivers of an increased CapEx, increasing CapEx to 1,000,000 20. The investment in a new bath facility has been put on hold, so it does not feature in our plans for 2020. Having evaluated a number of alternative plans last year, we decided investing in extending the life of the existing facility, the best option at this time. Lastly, in terms of looking forward to 2020, I should remind you that we will be reporting our divisional results using new end market divisions of Oil And Gas Water from Power And Chemical of Process And Industrial. Rotalk Site Services will remain embedded within these divisions. Before we get to the half year results, we'll provide a of the last 3 years in order to give a comparative for the 2020 results. We'll provide details at that time of the profitability of the 3 end markets. The margins of each of the end markets will probably be more similar than our current product divisions are. This is partly the result of the majority of fluid systems becoming part of the Oil And Gas division. Now turning to the operational review. This slide summarizes group's key markets and geographies. These slides are on an as reported basis. Sales to Asia Pacific grew 1% despite the strong comparatives, which included the large oil and gas projects we highlighted last year. North America and the UK were very close to 2018 levels. Eastern Europe, the Middle Eastern Africa decline the most, down 17% 16% respectively. This was the result of there being no repeat of the major upstream projects in in Europe seen in 2018, and the Middle East downstream was impacted by cessation of activity in sanctioned countries in 20 18. Oil And Gas declined from 54 percent of group revenues to 51% in total. Due to the factors I've mentioned, but within this midstream grew with spend in gas processing plants and pipelines higher. Water grew 1% with spend in North America And Asia Pacific, in power, a decline in thermal power in Asia led to an overall reduction of 10% in revenue. Industrial was the strongest area of growth, up 10% with North America And Asia Pacific, the best performing regions. Driven by spending petrochemical and HVAC applications. Turning now to the divisions. In controls, revenue was 0.9% lower on an OCC basis, recovering some ground compared with the first half. Improved material costs, the result of procurement savings and no repeat of the large high material cost projects in 2018, improved labor productivity and a reduction of nearly 5% in overheads resulted in a 10.3% growth in adjusted operating profit and margins improved 320 basis points to 32%. Revenues from oiling non oil and gas markets increased from 50% of the divisional total to 51% with industrial processes increasing to 18%. Water and waste water sales grew percent, North America, so a broad spread of municipal projects. In Asia Pacific, China led the way with 1 wasteful a treatment plant order topping 1,000,000. Industrial processes grew 4%. Growth was strongest in Asia Pacific with investment in stand alone petrochemical plants a large part of this. Power sales were up for North America, driven by by the sale of spares and replacement units for the nuclear industry whilst the much larger Asia Pacific markets saw a continued decline in the power market. Oil And Gas revenues declined modestly principally due to the tough comparatives. The previous year included several large, low margin Asia Pacific downstream projects, which were not repeated in 2018. Midstream was positive in North America with many small pipelines and measurement skid projects and in Asia Pacific with pipelines in India and China the most significant part. Rotox Site Services performed well. Fluid Systems revenue was 16.8 percent lower on an OCC basis. Even with a 150 basis point reduction in material costs, improved labor productivity and a 4% reduction in all other costs, adjusted operating profit fell to 1,000,000 and net margin was 6%. The underlying order activity remains at good levels, but the larger projects like those seen in the 1st part of 2018 remain and 4% from 20% of the divisional total, growing modestly in the year. Midstream Oil And Gas revenues also grew benefiting from an increase activity in Eastern Europe. Overall, however, oil and gas revenues fell 19% year on year. The result of a reduction in project in both the Upstream and Downstream segments and a weaker opening order book. On an OCC basis, Gears revenue was 2.6% lower and adjusted operating profit declined 3.3 percent to 1,000,000. U. S. China tariffs continued to affect gears more than any other part of our business, and the incremental cost in 2019 is largely responsible for the in material costs. Labor productivity and cost actions managed to largely offset this headwind and adjusted operating margins only declined 10 basis points. Revenue from non oil and gas markets increased from 46% of the divisional sales to 48% with water and waste water increasing to 21%. Industrial And Power sales also grew. Oil And Gas revenues declined as 20 eighteen's higher downstream activity was not repeated. Instruments revenue has grown 0.9% on an OCC basis, with improvements to material costs, labor productivity and the factory cost base, the costs of which have all reduced value, gross margin increased 180 basis points to 46.2%. Overhead costs increased but adjusted operating profit on an OCC basis increased 140 basis points to 24.2 percent despite the modest revenue growth. Instruments segment, which reported good progress, particularly in the Americas and Europe. Non Oil And Gas markets represented 61 of sales segment saw activity pickup later in the year. So in summary, despite a year of slower end markets, we've continued to execute our acceleration program, driving good margin progression and reducing working capital, which has produced another step up in return on capital employed. Whilst at the same time preparing systems and processes for the next phase of the program. I'll now hand back to Kevin. Thank you, Jonathan. Let me say a few words about our current views regarding the coronavirus. I'll first reiterate the safety and well-being of our employees, our customers, and families is the highest priority for our leadership team as we navigate through this period of concern and uncertainty. One thing to remember, the types of programs that the majority of our aids, etcetera, are unlikely to be canceled. However, we may see a push out for a quarter or so. As we've things today, we still We've previously disclosed Asia represents roughly a third of our group revenues, and certainly, China is a significant portion. Also plays a role from a supply chain perspective to road torque businesses throughout the world. Looking at the impact from the 3 primary locations to date, China, Korea, and Italy. Within China and Hong Kong, we have 1 factory located in Shanghai, plus 3 regional sales offices. We have 377 employees throughout China and Hong Kong, and to date, we've had no employees test positive for the virus. We currently have 6 employees remaining in the quarantine zone within the Herve province Our Shanghai factory after the mandatory extended shutdown has resumed operations and is already at over 85% production capacity. Our offices are in South Korea, we have 1 factory and 3 regional sales offices. We have no reported impacts from the virus to date on either our employees, our production capacity, 100 employees divided between sales offices and 3 factories. 2 of our smaller factories are located in the yellow zone, just outside of Milan, and one is located just north of Pisa in Luca. While we have no confirmed cases of the virus, we have one employee reporting symptoms and circa 30 employees in self imposed quarantine due to travel through the red zone within the last 14 days. Out of an abundance of caution, we closed our Casago facility for a week last week. The factory has now reopened and resumed full production. Outside of these regions, we have one employee who has contracted the virus. This was contracted while on a personal vacation to Asia, and the employee has not yet turn to our offices. We have an additional 5 employees or so under self imposed quarantine due to recent personal travel. We all record the situation remains very fluid. We remain diligent and focused on the well-being of our staff and our customers. We also remain keenly focused on providing our customers with the best possible service levels throughout this period. Quite frankly, It's too early to fully predict the impacts of the virus or the associated potential of economic stimulus that may be pending resulting from this impact. Let's now turn to the broader market environment. Aman's slide 16 in the deck for those online. Oil prices remain volatile throughout 2019. And since the end of 2019, we've seen a decline in the prices per barrel. Driven by a decline in demand, again, particularly driven by Asia and China, as a direct result of the coronavirus outbreak, coupled with an increasing supply globally. Current CapEx forecast for the oil and gas sector are tempering and are now reflective of an overall increase an upstream business where road torque has limited exposure outside of the pipelines required for shale oil takeaway. Oil And Gas accounted for 51 percent of group revenue, down from prior years, 54% of group revenue. Of Roadtorque's oil and gas revenues, over 73% are in the less cyclical mid and downstream portions of the oil and gas spectrum. Rothorque's upstream growth continues to be driven by Middle East wellhead expansion and the return of subsea business. The midstream segment for road torque is largely about pipelines and LNG. We see pipeline expansion serving the US market in both oil and gas and water applications and pipeline expansion specifically related to LNG as well as a general LNG related expansion pipelines globally. Within our downstream business, we continue to see positive momentum in both refinery expansions and capacity upgrades, particularly throughout Asia. Despite an underlying moderation in industrial growth global We've seen our industrial and process businesses continue to outpace underlying growth due to the replacement of fluid systems actuation with electric actuation in industrial applications. We continue to find opportunities for further growth within our industrial markets. In our other end markets, we expect water to continue to see modest expansion in the North American market and continued strong expansion in India, China, and throughout Southeast Asia. Whilst we see a structural decline in our power forms of energy generation, we feel the decline witnessed in 2019 is unlikely to be repeated on a similar scale. I wanna draw your attention to the important of small to midsize orders to row torque, and we thought we'd provide a little perspective today. As depicted here on the bottom of this slide, we estimate that maintenance repair, and small to midsize automation and improvement projects, that is individual orders less than £100,000 generate 75 percent of group orders by value in a typical year, and that orders above £1,000,000 represent only 5% of group order intake. This matters as customer capital expenditure budgets are more likely than their operational budgets to come under pressure during uncertain economic times. Such periods often see an acceleration in automation activity as this typically represents an attractive return on what can be a relative modest investment. As such, our business is more related to the operating budgets of our customers, than their capital budgets. Let's take a moment and review some of our 9 financial KPIs relating to our ESG agenda The health, safety, and well-being of our people and of our visitors is our number one priority. I'm pleased to therefore report a 22 committed to reducing our environmental impact by reducing our energy and water consumption, waste production and by preventing pollution. We operate an assembly only philosophy at most of our business units, meaning the majority of our energy use is on lighting, heating, cooling, and it systems. Our site consolidation efforts and other initiatives contributed to an excellent progress reducing our environmental impact for the year. Rotorx overall carbon emissions were 13% lower for 2019. Additionally, we reduced our electricity consumption by over 11% and our water usage by over in company stock, and I'm pleased to say of our senior roles, they are now comprised of 23% women. Our 4th quarter pulse raise continue to show progress with an overall global engagement score of 7.3 out of 10, representing a high level of engagement. In our pace of change score, 1 again came in at 6.2. Given the number of initiatives we are driving at road torque, we consider this pace of change score very important. Participants can answer 0 through 10 with 0 representing our pace of change is too slow and 10 representing we are moving too fast as a company. Feel this is right about where we included ESG performance metrics as part of our executive bonus schemes. Before we begin taking a closer look at our execution within our growth acceleration program, let me be a bit more explicit for a moment about what drives our growth. In addition to the general macro trends such as population and middle class growth, infrastructure investment and modernization, and water scarcity to name a few, Rotor as the world's leading provider of electric actuation benefits for the dry for process automation and trolls. Our onboard smart diagnostics enable preventative and predictive maintenance, allowing our customers to avoid costly and unplanned County. Within our growth acceleration program, we have identified 5 key initiatives that we believe drive our future growth. These include becoming easier to do business with, which is driving competitive advantages through best in class on time deliveries quote turnaround times, and improve client communications. The reorientation of our business towards targeted end markets They're in driving a deeper understanding of our customers' needs and creating improved value propositions. The double down in our highest growth markets, where we are adding resources and sales, customer service, and road torque site services as well as localizing production in these regions to further reduce lead times. The acceleration of our innovation in product development efforts through revised and enhanced processes and the adding of additional engineering and program management capabilities. And the continued investment revenue growth we have enjoyed over the long term. Now let's take a closer look at our growth acceleration program, and I'm on slide 19 for those joining us online. I'm pleased to report that our growth acceleration program remains on track and our team's execution on our priority is very strong. Our 4 pillars and our underlying set of portfolio assessments each continue have a role in driving the growth and margin enhancement we desire. Since its 2018 inception, our growth acceleration program has delivered £13,000,000 of P and L benefits and over £30,000,000 of working capital improvements. Let's take a look at our 29 activity within 4 pillars of the growth acceleration program. And as our usual practice, we'll begin with our customers first and start with the commercial excellence pillar. We've mentioned that we initiated our migration from a product based organization to an organization more closely aligned around market segments in the first half of twenty nineteen. We we've successfully completed our North Asia transition in the second quarter South Asia and Q3 and Europe and the Middle East in Q4 of 2019. In this quarter, we complete our transition in the Americas. Our value selling program was launched in 2019. And after developing our value selling toolkit, we trained and certified over 2 75 team members. Within our site services business, which represents our aftermarket business, including field services such as installation, commissioning, retrofits and grades, our focus is twofold. We continue to streamline our processes and our organizational structure to allow scale and service capabilities, including regionalizing or centralizing thumb support functions. This while simultaneously accelerating our bra aftermarket and lifetime management programs. We continue to add and rebalance our resources geographically to ensure we are providing the necessary service personnel in our highest opportunity regions. We'll continue driving the comprehensive lifetime management of our installed base as we progress through our migration from reactive to preventative to ultimately predictive maintenance programs. Turning to our innovation and new product development, We continue increasing our emphasis on new product development efforts to drive organic growth. Our engineering efforts continue to focus on providing our customers with energy efficient electric actuation and adjacent solutions as we repur place hydraulic and pneumatic actuation. Reducing our customer emissions, increasing our customers' operating efficiencies, and providing greater connectivity and process control through advanced and secure communication protocols. Our engineering leadership team is now largely in place, and we launched 17 new products in 2019. Depicted on the bottom right of this page is one of the many solutions we provided our customers in 2019. This application is on water gathering and transmission pipelines used in the US shell patch. Our engineering team worked along the pipeline provider to create a solar powered valve actuation solution, encompassing battery backup IQ3 electric actuators. Not only did our solution provide environmental benefits, allowing our customers to reuse and redirect water between wellsite It also dramatically reduced the installation cost by eliminating the need to entrench power lines along the entire length of the pipeline. This is a great example of our engineering solutions, allowing a traditionally non water based customer, more efficiently manage their process water and increasingly scarce resources at a dramatically reduced installation cost. These types of water applications are fast growing sector for us. I'd also like to discuss a few examples of early wins we'd received from our market realignment efforts. The first is within our oil and gas segment, which represents our growing relationship with 1 of the largest Chinese oil mass companies. This company began entering into framework agreements 3 years ago in order to simplify their ordering process for standard furbishments, retrofits, and upgrades, and to standardize on industry leading platforms. For the 1st 2 years of the program, I'm pleased to say that Rotorque won the electric actuators frameworks, which have amounted to nearly £3,000,000 per year. This year, our current Our new market aligned team took forward our entire road torque portfolio of products, and we successfully extended our framework agreement to now include our flu systems products as well as our Instrumentation products. Within our Chemical Process And Industrial segment, our team identified a application and new targeted customers. As the team pitched the entire road torque portfolio, we were awarded our 1st order in this application amounting to £750,000 covering both electric and fluid systems actuators as well as Within our water segment, the team successfully leveraged a long standing relationship with a large multinational valve maker extending our offerings to our product lines leading to over 20% growth with this customer year on year. These are early wins and our customer and sales feedback remains very strong in support of our market reorientation. Turning to our operations excellence pillar, Our global operations teams lead our efforts to drive a safe, organized, efficient, and sustainable workplace on our factory floors in our offices and at our customer sites, which in our site services business. As we've now rolled out our Rotorke lean program to our largest facilities, we've completed over 90 rapid improvement events or RIE in 2019, which nearly £20,000 of hard savings. Depicted here are 2 of the one page summaries. The first at our bath facility is the conversion of second assembly flow line. This effort resulted in a 20% labor labor savings, a 20% reduction in area required for the line and an overall substantial substantial capacity improvement. The second represents the reorganization of our gear manufacturing process in our Leeds facility, which accounted for a throughput increase of over 44% and substantial labor savings. These summaries occur created after each event and are shared internally to all operational team members and are placed on our operation SharePoint website in our efforts to spread best practices. We continue to execute well on our supply chain improvements, and we met our committed £1,000,000 of savings in 2019. This despite what you've seen is our dramatic inventory reduction. 1 of the outcomes I am particularly pleased with is our road torque inventory management program, which was very successful in 2019, yielding an overall £21,000,000 inventory reduction. This, while simultaneously increasing our on time delivery to our customers by a full 5 percentage points. In relation to our footprint optimization and our ongoing commitment to improve our cyclical resilience, we continue to execute well on our site consolidations, and we completed 2 additional facility closures in factoring locations by 27% in a roughly 2 year time frame. Let's now turn to our talent and culture pillar and to key enablers. We continued to strengthen our senior team throughout 2019 welcoming 15 new senior leaders to Rotor. After defining our vision mission and direction in our new values and behaviors program formally launched in September with 50 sites from around the world participating in our values and behaviors launch on a single day. While we certainly have more to do, we've made significant progress in our diversity commitments over the last 12 months, and I am pleased to state that at least 20% of our PL board, management board, and senior leaders are now female. Turning to our 4th pillar, IT and core business process fees. In 2019, we added to our business intelligence platforms, including Global Sourcing, innovation and new product development effectiveness and program management, and a global property dashboard, which allows centralized visibility all our properties and leases in all regions of the world. In 2019, we completed the design of the global blueprint for our chosen enterprise technology platform, and we deployed our field service application in 2 regions of the world. This common field service platform allows us to share infrastructure resources between sites and, therein, reduces our administrative cost structure. We've also designed our early release candidates which are subsystems including a global CRM solution and a global HR platform The global HR platform goes live in Q1 and the global CRM program in early second quarter. Our efforts to simplify and focus our business continue, and we have now either closed or sold 6 businesses and reduced our SKUs by 12% in the last 2 years. I'll close out by summarizing our 2019 and by making a few comments on the look for the year. In summary, I'm very pleased with our team's continued execution across our growth acceleration program. Our transition to a market oriented company is nearly complete. Our innovation and new product development efforts are accelerating and our operations and supply chain organizations are delivering. We've launched our new purpose as a company along with our values and behaviors and perhaps most importantly, our company wide pulse surveys continue to reinforce that we are bringing the company along in our journey. Now, turning to our outlook. Looking ahead, it's too early to assess fully the potential impact of COVID 19. Absent these, we were planning for modest sales growth on an OCC basis and margin progress in 2020, our investment plans. Before closing, I just wanna pay tribute to our teams in China, Korea, and Italy who have been out standing in the way they've dealt with the coronavirus challenges and the speed with which the entire road torque team responded to the situation. With this, Jonathan and I would be delighted to take any questions you may have. This is where we miss Michael sitting in the front with the first question. Yeah. Thank you. Mark Davies Jones from Stifel. A couple on the evolution of mix by end market, if I may. Obviously, short term new oil and gas business under some pressure, but I see in the statement there's also longer term review of the opportunities around energy change. You're pointing to positive opportunities. Can you talk a bit about that? Because I think most people see that as a threat. And then the other side of it is historically, Roche Oak has struggled to make quite the margins in non oil and gas business that it does in oil and gas. That seems to be beginning to change, I guess. Could you talk about the relative profitability in the segments? So we'll talk about relative profitability first. And that is, if you recall, IQ3 actuator, as an using that as an example, that we sell into a water application is the same margin and same price we'll sell into an oil and gas application. So from a from the majority of our products' standpoints, there's not a big differentiation in an individual product depending upon the segment it's serving. The second area of focus is on our Instrumentation piece where it's the 2nd highest, margin group that we have today. Obviously, it changes as we go forward. And again, it's experiencing on a growth rate, the fastest growth rate. So our penetration into other industrial markets, be that HVAC, Tunnel, General Industrial Process, there is more growth rate to be had there for us. So I think that's what you'll see in the continuing mix. You'll continue to see oil and gas passed via a large portion of our business within Rotor, but you'll see a disproportionate growth from a rate perspective in those industrial and process sectors. And, again, with, portfolio of products that has a very attractive margin to us as well. Then on your first question, the energy sort of transition and products. Kevin highlighted some of the areas that the R and D is focused, and I think that's quite an interesting steer in terms of where some of those opportunities lie. So for example, replacing pneumatic actuators in applications where the pneumatic actuators vent the gas of the process tip atmosphere is increasingly being clamped down on. So replace those with electric actuators is a part of that process. I think also, the kind of the utilization of solar energy in actuation is relatively new thing as we saw the example of that on the slide in there. But there are many other applications, are those sort of using those sort of combination of technologies? Okay. One very much smaller question. And the Pittsburgh business that you sold division does that sit in? Yes, in Fluid Systems. Good morning. It's Ed from Citigroup. Just asking on the order trajectory. Clearly second half order momentum was much stronger than the first half. Did that continue into sort of December and into the new year as well? I guess in terms of order trajectory, I think we're still, as we look into January, February, we're still happy with that supporting the modest growth outlook that we're saying for the year as a whole, so it's continued at reasonable levels to support that. Good morning. Hi. It's, Chantan Hur from Barclays. Just a few questions. First, you can just a little bit about the balance sheet, obviously, big net cash position, good cash generation in 2019. How do we think about that in 2020? Are you starting to look for M and A Is that sort of coming up in terms of your sights or could you think if the cash continues to come up with the balance sheet? Maybe at some point, you return that. I know the strategy you've done Yeah. I think for the, for the near term, well, answer your question, yes, we're very focused on, we think one of the great uses of our cash is going to be 1st and foremost, reinvesting in our organic growth. And you're seeing that as we increase our investment in the front end of the business sales force and also in new product development this year. So is certainly a focus on, on growth through M And A. We have, a team very much focused on that, today, and we hope to be successful. Right? It's one of the hardest things to comment on, as you can imagine, but we do consider that part. And I think in the near term, given the level of un certainty driven in the markets by the coronavirus. I think maintaining that flexibility on our balance sheet is critically important at this time, maintaining that of liquidity. So I don't expect us to do anything from a return in the near term. Okay, great. And second question is just on-site service. Obviously, you split it out and give us the number of sales. I know you're not going to be that exact. Can you just give us a little bit of a feel of the growth rate coming through in that business inside service? It continues to be in the high single low double digit growth rate. Okay. So it's accretive growth. And just the last one, just in coming back to that order book, can you just talk about a phasing of that through 2020? How much of that order book comes in in 2020 and how is the phasing? Is it Q1, in terms of delivery or is it more sort of second half just a feeling? So in terms of the order book that we finished the year, yes. And there's a small element of that that pushes out into 2021 as their elbows is. And I think you still almost look at the different product lines and the lead times for those being one element, so fluid systems, order book would typically be a longer, run but it's very hard to generalize. If we look at the subsea business in instruments, it's typically a program delivery business, which means that those orders, whilst in book at the end of December might run through until fourth quarter of 2020. So it is skewed to the first half certainly, but there's a bit of a tail. Hi. It's Sandy Wilson from JPMorgan. I've got 3, please. On site services, obviously, just been talking about, when you think about kind of accelerating the growth there or or taking, I guess, advantage of the opportunity. Is that going to require additional investment or is that basically using the resources you already have more effectively? Just trying to think about kind of cost smart and don't make sense. So it's both. So if you think about, we used to stand up and talk about the number of, members of the site service or organization. Right. And I know that, we were excited in the audience when you saw that number grow every year by 25, 30 individuals. I can tell you that this year, by 25, 35. By 30. Yeah. Because it was about increasing efficiency, and reallocation of those resources towards higher growth market. So, what you saw this year is with the new leadership inside services, a keen focus on productivity like we're doing throughout the entire organ mission. And as we lose an individual in a region, looking really hard to say, well, that region can cover it with 4 instead because I'd rather put that 5th in our higher growth market in Asia. So, which is why it's missing from the presentation in terms of the total number. So in that case, it's really about reallocation of resources. In addition to that reallocation, we are adding additional incremental resources in terms of as we're selling larger programs, for example, to customers that last multi years, adding specific pro management resources. So in addition to the field service technicians, we've added recently 2 new program management resources to handle some of the larger multi year program we're entering into. So we are adding some additional resources as well as reallocating. And just in terms of specific end market, but talking about mid which obviously was kind of the success story of oil and gas this year. Just thinking of into next year, I think you made some comments, but just trying, I guess, flesh out a little bit by region on that because I think there's a fair amount of debate around LNG, for example, in terms of kind of what that looks like this year, particularly in the U. S. Just trying to get a sense of kind of midstream is a big picture and assume a little bit by as well, please? So I think midstream in North America, the biggest focus is still the, as the capacity in North America continues to increase, I think we've we pulled back a little bit, and the last week was the first time we had kind of a down amount of pumping per barrel per day. But it's certainly not geared at seeking a new level, it will continue to increase. The biggest restriction in that is still oil takeaway. So that's still where we see midstream very strong and the pipeline still being required to take that away, as well as the application that we shared, which was really about, the more efficient use of water in those same applications, requiring those gathering pipelines and stuff that are getting built now as well. So we still see that midstream in shale in the particular place we play still has a couple of really good years ahead of it. So we feel really good about that. And then other you still have the general build out of pipelines throughout, Eastern Europe into China, for example, throughout the Middle East that's still going to continue. So we feel pretty good about the midstream space for us. So when you're talking about U. S. Midstream, it's not a comment about LNG specifically, that's just an element of it? Correct. Yeah, okay. Correct. And then thirdly, just on working capital, obviously, a lot of progress and a lot of targeted progress. And I think we've probably, this time last year, we've probably talking about how we wanted to make progress, but how sustainable and kind of how much more do we think there is to go for there? So obviously, you've had a big jump. So let me give you kind of a short term answer in a long term. I think over the long term, we still have a lot of progress in particular on the inventory reduction to be had. The reality here is in the short term for the next couple of quarters, we'll likely increase in inventory as we, get very tight on managing the global supply chain resulting from the coronavirus. So the reality is there will be an uptick as we invest in inventory until we have better understanding of the longer term impacts, but that'll be a short term peace for us. Long term, there's still lots of opportunity on our inventory reduction. Good news is we reduced inventory £21,000,000 last year. The bad we did it in a time where supply chain is getting more critical. Alright. So So I'm here. Richard Page. You can grab it at the wrong way, mate. It's no better, Richard. Richard Page from Numis. Just one question actually on controls. The margin progress is very strong there and actually it looks like it's all second half. Could you just flesh that out as to whether anything exceptional going on there or or what happened? I think one of the interesting things controls is probably the furthest along its facilities on our lean journey is certainly, one of the key elements. And as Jonathan said, if you remember the second half of twenty eighteen where we really delivered a lot of the lower margin large programs for downstream in Asia, we didn't have that repeat. So it's a combination of several factors, increasing operating efficiencies through lean, and then some margin enhancement from a driven savings as well. That's true. So there's a bit of all of that. Bill Hunt. Just in terms of the gap journey that you're on, I wonder looking out to the 12 months whether you have identified any specific sites that are planning for closure in 2020. And in terms of the inventory on broader working capital target, notwithstanding what you've said about the near term inventory issues, what would good look like in terms of percentage of sales for working cap And then finally, on a similar theme, in terms of the SKU reduction, that 12% is that nearer the start of that particular journey or nearer its end? I'll take them in reverse order. The, the SKU reduction were probably closer to the end than we are at the beginning. We still continue to refine and look at those SKUs on a regular basis. But we've worked really hard on that in the 1st 2 years in terms of simplifying our business and stop doing those things that either have very low margin or track the leadership team at a disproportional level for the revenue. So I think we're that will be a continuing process but we won't see the same scale as we go forward. So we've taken, a big piece of that. I think relative to the facility closures, this is a year for us of rebuilding. So if you think about in 2019, we had hoped to close 3 We we executed on 2. And prior to finishing the 3rd, we had some large orders come in. And with that, we we deemed that we postponed that when until the first half of this year, and that will still now be done in the first half of this year. Towards the end of the year, there may be, 1 or 2 small opportunities for us, but this is a year of, rebuilding some of our, what we call, receiving facilities where we're adding, doubling the size of our Rochester facility, for example, to be able to receive some additional facilities and to receive somewhere between 6 and 7 turns. The I look at it. And we're we have a long way to get there yet. It's Robert from Morgan Stanley. Just like to go back, I guess, to the big picture between growth and How often in the, sort of orders you're taking at the moment you're making that decision, maybe to sort of push off an order and, and, kind of release the focus on taking the highest margin business. Is that becoming a problem for you at all? Or is that a decision? No, not really, really to that. Most most of the time we're specified, quite often, and as such, we tend to not do a lot of discounting in general. So our level of discounting hasn't changed a lot. We're not sitting there pushing chunks of business away in terms of protecting our margins. We're not seeing that at call. Thank you. And then, one question I had was around the Instrumentation business. You've obviously built that up over the last few years through a series of acquisitions of which the margin spread across those different bits have clearly been quite big. When you're looking at potential future position targets? Is that a division in particular you're looking at? Are you willing to buy stuff below the divisional margins with a view to improve it or given your in focus, are you sort of looking for stuff just at or above the division? So, first, I think it's going to be hard to find a lot of accretive acquisitions on a margin basis that work from a financial return perspective, right? Those businesses that are gonna be up in those mid-20s are gonna trade at such high pulls, it'll be really difficult to provide a fair enough return to our shareholders. So I think there is a balance between businesses that have a decent margin that we can actually use our scale, our channels and those true, synergies to get it back up to a reasonable margin, a non dilutive margin over time. So I think that's what we'd be focused more so, no, but you're right. That is an area that we are focused our M and A fire power on. Thank you. And then just a final one was around supply chain. How have you changed what you've done since this coronavirus issue has kind of come up? Have you broadened your number of supply it a case of just managing the ones you've got better? Does it change the way you think about your supply chains? We were speaking earlier about the amount of inventory you have sort of sitting on boats moving around the world to different factories, has anything changed, or are you just kind of managing what you do more careful way? I think we're managing what we do in a more focused way at this point. So the the challenge is while we're coming up online quickly in China, for an example, they the logistics and the global push logistics, primarily, frankly, driven by the automotive sector. We were able so we have some increasing costs in the first quarter due to logistics as we increased a lot of air freight out of China as we saw the virus developing, and we thought that this may be an issue. So we had probably a couple £100,000 of additional, costs related to freight, getting stuff out of China to keep our customers up and running in all other areas world. Since then, what we've seen is logistics prices increase out of China, in and out of China, frankly, in both directions. As well as the time, increased somewhere between 5 8 days to get those goods in and out, just simply because of the labor the ports and what have you. So that's where we're focused on really getting much more advanced where it focuses on supply chain more keenly for us. We do look at our suppliers, and we've talked to them. We've rated them high, medium, and low risk relative to our level of inventory, their current production capacity. And out of all that, and we have a chart that we look at every other day that lists some 60, what we call critical suppliers, an those suppliers, there's only one that has not yet returned to full green status out of that. So we have one left, out of our critical list. So we're focused on that. What it really forces us to do in the near term is to ensure we're communicating very keenly with our customers because we are going to be in a period of prioritizing orders, right, as things come on and we get goods and convert those goods to customer orders. We'll have to continue to communicate with customers most for their current, for their current schedules probably 3 or 4 months. Thank you.