Earnings Call: H1 2019

Aug 6, 2019

Well, good morning, everyone. I appreciate you joining us as we discuss our 2019 interim operating results. I'd also like to welcome those joining us via Webex. I'm 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 a few highlights from our first half of twenty nineteen. Then we'll have Jonathan walk us through the financials in a bit more detail. I'll then return and discuss the progress we're making on our growth acceleration program and say a few words regarding our outlook for 2019. As I reflect on our progress for the first half of twenty nineteen, it can be characterized as one of continued focused execution towards our previously stated ambition of delivering sustainable mid to high single digit revenue growth and mid twenties adjusted operating margins over time. We're now 18 months into our 5 year journey, which continues to build upon the best elements within road torque, while adding management driven improvements to stimulate the growth and the margin we desire. Against the backdrop of macroeconomic conditions that continue to be uncertain, Once again, we have delivered strong operating performance. Against the demanding comparison period, and absent orders and revenues from sanctioned countries hone order intake was down less than 1% on a reported basis, and revenues declined 3.7%. This revenue decline was partially the result of a difference in the timing of orders received. You'll recall in 2018, our first quarter was significantly larger than our 2nd quarter, with the receipt of several large project orders within our downstream business in the far east. This year, encouragingly, Our 2nd quarter order intake was ahead sequentially and year on year on an OCC basis, indicative of the gradual improvement and overall activity level we've seen in recent quarters. I'm pleased with our first half execution as evidenced by Continued progress on operating margins, rising a 130 basis points on a decline in revenues to end of 21.1%. Strong cash conversion of a 117 percent with period ending net cash of £43,000,000. This level of cash generation continues to demonstrate our ability and a 250 basis point increase in return on capital employed to end at almost 30%. Once again, a strong demonstrating our team's continued ability to drive day to day execution, whilst implementing the initiatives identified through our growth acceleration program. We'll have Jonathan walk us through our detailed first half financial results. You, Kevin, and good morning, everybody. We're pleased to report progress with the growth acceleration program, particularly in respect of margins and cash generation, especially against a backdrop of continued macro uncertainty. Order intake in the second quarter was higher sequentially and compared with the second quarter of last year. The impact of currency, which started the year as a headwind, switched to a tailwind in the second quarter, and over the first half as a whole, was roughly a 1% tailwind to revenue and profit The businesses disposed of in 2018 reported 2,000,000 of orders, £2,500,000 of revenue, and 1,000,000 of adjusted operating profit in H1 2018. Both the currency and 2018 disposals are adjusted in arriving at organic constant currency or OCC results. Order intake of 1,000,000 1.3% lower on an OCC basis. The order book at 1 point is 1.6% lower than June last year, but 24 percent or 1,000,000 higher than the start of the year. Revenue was 1,000,000, lower on an OCC basis. Adjusted operating profit of 1,000,000 grew 1.7% and margins on an OCC basis were 120 basis points higher than H1 2018 at 21%. Adjusted earnings per share was 5.8p, a 1.5% increase and the interim dividend is 2.3p, up 4.5%. The order book increased 1,000,000 between fluid systems and controls. Controls saw good growth in order intake, but the order book currently has a greater proportion of orders for delivery in the following financial year than it did in June 2018. Fluid Systems on the other hand has seen the sharpest reduction in order intake compared with a very strong H1118. The 2018 order intake pattern was unusual and this year looks likely to revert to the more normal patterns such as we saw in 17. This would typically mean include systems is the division where revenue is most highly H2 weighted. Instruments benefited from an uptick in subsea activity, which with longer delivery time frame has boosted the order book. The adjusted operating profit bridge on an OCC basis shows that the reduction in volume has more than been compensated for by lower costs in all areas as we see pleasing momentum from the growth acceleration program. Materials were 80 basis points lower compared with H1 2018, with nearly half of this due to positive divisional mix and the remainder due to improvements in 3 of the divisions. This is where we see the positive impacts of sourcing and price as well as the negative impact of tariffs. Improving direct labor productivity and reductions to the fixed cost element of the factories added a further 100 basis points. These improvements totaled 1,000,000 and on an OCC basis, gross margin improved 100 basis points to 45.7 percent. Overheads reduced 4,000,000 or 5.1 percent, half of which was due to lower headcount with the balance spread over many cost headings. As a result, adjusted operating margins increased 120 basis points to 21%. Overall, headcount reduced 4% in the period. We've added in some key areas and reduced in other areas either through productivity improvements, rebalancing resources geographically, or establishing a solid base from which to grow. Some of these cost reductions will reverse in the second half as we build headcount in certain focus areas and disciplines. We started the year with net cash of 1,000,000, but the introduction of IFRS 16 on leases reduced this by 1,000,000. Cash conversion in the period was 117%. Working capital in the cash flow, which uses average exchange rates, was an inflow of 1,000,000 with inventory the main driver. CapEx was 1,000,000,000 we see an increase in IT investment, but no major spend on facilities in the first half. We closed the period with net cash of 1,000,000. Net working capital has decreased 1,000,000 compared with either December or June 2018. The growth acceleration program, inventory reduction initiatives began to gain traction in the period, and inventory has reduced 1,000,000 since December, and 1,000,000 since last June. As a function of revenue, it is 13.8% compared with 15.3% last June or 13.6% in December which benefits from the higher percent of revenue based on 2 times H1 sales, an increase from 27.7 percent for the full year 2018 but slightly below the 29% last June. Return on capital employed has increased points over the last 12 months to 29.7 percent, 50 basis points higher than the year to December, driven by both the increased profitability and reduced asset base. The adjustments to profit in the period comprise redundancy and restructuring costs and intangible amortization. Restructuring costs, largely relate to the 2 manufacturing sites we've closed this year in Taunton and Tulsa. Activities have been transferred to other locations, but redundancies and asset write downs at both sites totaled 1,000,000. The payback on the GBP 2,700,000 cash cost of these 2 site consolidations is within our 2 year target for such activities. These costs are weighted to the 1st half, so we anticipate full year costs to be circa 1,000,000. Looking to the full year, let me provide some guidance on is 20 basis points lower than 2018 at 23.5 percent. There are no significant changes within this reduction, but it is driven by the geographic mix of profits plus tax rate reductions in some specific markets. Our focus on the global supply chain continues to yield results and we remain on track to deliver the GBP 5,000,000 of targeted savings this year. The second half will see an increase in people costs compared with the first half as having reduced in some areas to balance geographic coverage and skills, we'll begin to invest in support of our growth ambitions in our emerging markets. Bonus and share scheme costs are also H2 weighted in line with profit. Whilst our guidance is based on OCC numbers, currency will impact the headline results using a U. S. Dollar rate of 1.22 and euro rate of 1.10 for the remainder of 2018 would result in around a 2.2 percent tailwind to revenue and operating profit for the year as a whole. Investment in the new ERP system is progressing as planned, however site development plans are being reassessed as our lean initiatives gain momentum. As a result, CapEx for the full year is likely to be lower than the range we guided to in March, more like GBP 25,000,000 in 2019. In our preparation for Brexit, we've looked at the risk of a hard Brexit whilst the timing of this has changed, it still has the potential to impact our results by circa GBP 1,000,000 this year if we move to WTO tariffs from 31st October. US China tariffs are already having an impact, largely on the gears division, costing GBP 600,000 in H1, based on the current position, the costs will rise to around 1,000,000 for the full year. Now turning to the operational review. This slide summarizes the group's key markets and geographies. These slides are on an as reported basis North America and Latin America were the 2 regions which grew, Asia Pacific and Eastern Europe faced much tougher comparatives with the larger projects reflected there in 2018. Midstream was the fastest growing end market and as a result, oil and gas increased 53% to 54% of group sales. Downstream declined but at a slower rate than group sales as a whole. Water grew, but this was compared with a relatively slow start to water in 2018 in North America. Power sales fell by 9 18% led by India and China, but this reduction also includes the impact from the sale of our nuclear actuator business last year. Industrial process was flat with growth in Asia Pacific, offset by declines elsewhere. Turning now to the divisions. In controls, order intake was up 3.7%, but revenue was 2.5% lower on an OCC basis. Gross margins improved 150 basis points. The lower material costs were the result of procurement savings as well as favorable product mix and the large, high material cost projects in 2018 were not repeated this year. Labor productivity improved, contributing 30 basis points, but other factory costs did not reduce quite as fast as revenue, a 40 basis point headwind. At an adjusted operating profit level, OCC margins improved 210 basis points. Water and waste water sales grew the fastest in the period, up 1,000,000, most of this was in North America and due to weak comparatives. Industrial process sales in Asia Pacific led this market to increase to 18% the division. Oil And Gas remained 50% of sales with small increases in Downstream offset by a larger decline in Upstream. Dowestring growth was largest in North America and the upstream reductions largest in Eastern Europe, where we delivered a major project in H1 2018, The declines in power, which reduced to 14% of the divisional sales, was principally thermal plants in India and China. Fluid Systems order intake was 17% lower on an OCC basis. The comparative period was very strong, particularly in Q1, and the lower large project activity and closure of markets due to sanctions contributed to the reduction. Underlying day to day business remains at good levels, but the larger projects continue to suffer delays to order placement. With lower order intake, particularly in Q1 and a smaller order coming into the current year, revenue was down 15%. Material costs are 190 basis points lower, and this has been added to by productivity gains. However, was actions were taken to reduce the cost of factories by 1,000,000 This was a smaller rate of reduction than revenue. The net impact was a 120 basis point improvement in gross margins despite the revenue reduction. Cost control activities were also applied to overheads reducing them by the lower revenue, so net margins were 130 basis points lower. Looking at the end markets, midstream grew in the period, led by Eastern euro Latin America. Latin America was the only region to show overall growth, with North America showing the greatest decline largely in oil and gas. The large projects delivered last year, with Downstream And A, the major Pacific and Upstream in Eastern Europe, the most prominent, were not repeated in the current period. The sharp decline in power was the result of the sale of our nuclear actuator business last year. On an OCC basis, order intake in gears was 4.8% lower, but underlying revenue increased 3.2%. Despite improved labor productivity and factory efficiencies, gross margin fell 440 basis points. Material costs rose £2,700,000 or 500 basis points due largely to supplier cost increases and the US China tariffs with some impact also from the mix of sales between external customers and the other divisions. Overheads reduced 12% in the period and also benefited from the closure of the valve facility last year. The net result was a million reduction in adjusted operating profit, a 210 basis point reduction in adjusted operating margin. Margins in H2 faced the increased impact of tariffs, which I mentioned earlier, and these affect gears more than the other divisions. Midstream and downstream sales drove the increase in overall oil and gas sales from 60% of divisional sales for the activity in North America most positive. Water and industrial sales were slightly lower and North America was the strongest growth region with Middle East, Asia Pacific and Eastern Europe all showing some growth as well. Instruments order intake increased 8.3% on an OCC basis, boosted by an uptick late in the period in subsea activity. Revenue was slightly lower. Underlying gross margins increased 230 basis points, benefiting from improved material labor productivity and a reduction in factory costs. When combined with a GBP 700,000 reduction in overheads, this led to a 330 basis point increase in adjusted operating margin to 24.8 percent. Both H218 and the current period benefited from the increased focus on managing the cost base, including the closure of the regional engineering center in Q3 2018, These results are slightly ahead of the 23.6 percent adjusted operating margin in the second half of twenty eighteen. Upstream and midstream sales grew in the period, but a larger reduction in downstream means oil and gas reduced by 1% to 46% of the division's sales. The other end markets were fairly consistent with H1 2018, and the only changes industrial increased by 1% to 22% of sales. Geographically, Asia Pacific and Middle East increased slightly and Western Europe decreased slightly. All other regions were very similar to H1 2018. I'll now hand back to Kevin. Thank you. Thank you, Jonathan. Let me now say a few words about our current markets and environment. I'm on slide 16 in the deck for those online. Oil prices remain volatile in the first half, but above what we consider as incentive levels of $50 per barrel for WTI and $60 per barrel for Brent Crude. Current CapEx forecast for the oil and gas sector are tempering somewhat and are now reflective of an overall increase of low to mid single digits year on year versus prior predictions of mid to high single digit increases. For rotor, oil and gas accounted for 54% of group revenue, with a significant increase in the percentage of midstream sales as a proportion of revenue, offsetting a small reduction in the percentage of contribution from upstream. Roadtorque's upstream growth continues to be driven by Middle East wellhead expansions and an overall drive to increase operating efficiencies and The initial signs of the return of the Subsea business, partially offset by reductions in spending in Eastern Europe. The midstream segment for road torque is largely about pipelines and LNG. We see pipeline expansion serving the US Shell market, and pipeline expansion specifically related to LNG, as well as general LNG related expansion beyond pipelines on a global basis. Midstream sales growth was also evident in the Far East, Eastern Europe, and Latin America. Within our downstream business, we continued positive momentum in both refinery expansion and petrochem, driven largely by a growing population and increasing prosperity. Downstream sales were lower overall despite encouraging growth in North America, largely due to the prior year's significant project orders in Asia. While much has been said about the current volatility in the US Shell market, I'll remind you, historically, this has not been an area of focus for road torque. In our other end markets, we expect water to be mixed geographically, with modest expansion in the North American market, strong expansion in India, and moderating growth in the near term in China. Whilst our sales in the power market declined double digits, contributing to this decline, as Jonathan indicated, was the sale of our nuclear actuator business last year. Industrial process sales were flat, reflecting the general industrial sector moderating as growth in China and the US slows as a result of their current trade disputes and the carry on impact this is having on global markets. Now let's take a closer look at our work stream progress. I'm on slide 17. I'm pleased to report our growth acceleration program remains on track and our team's execution on our priorities is very strong. The overriding themes of our work streams continue to include reengaging, reinvesting in, and strengthening our customer focus and intimacy, driving operational and supply chain efficiencies, improving our processes and focus within our innovation and new product development efforts, improving our talent acquisition and development and cultural programs, a renewed emphasis on headcount productivity, and a critical review portfolio assessments each continue to have a role, driving the growth and margin enhancements we desire. Let's take a closer look at our execution in the first half of twenty nineteen within each of these pillars. As is our usual practice, we'll begin with our customers first and start with our commercial excellence pillar. Turning to slide 18. 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 successfully completed our North Asia transition in the 2nd quarter, and we've initiated the transitions in South Asia, Europe, and the Middle East. We continue to expect that we'll be largely complete with our phased in approach by the second quarter of 2020. Our efforts to streamline our quoting, sales, and back office processes are going well demonstrating the power of applying lean techniques beyond the manufacturing shop floor. We kicked off our value selling process fully developing our road torque value selling toolkit in order to drive price yield through a deeper understanding of the value our products and services provide our customers. By year end, we will have trained the vast majority of our field sales team. In our site service business, our focus is twofold. We are streamlining our processes and our organizational structure to allow further scale and service capabilities, including regionalizing or centralizing some of the support functions. This while simultaneously accelerating our broader aftermarket and lifetime management functions. We continue to add and rebalance our resources geographically to ensure we're providing the necessary service personnel and our highest opportunity regions. Under the leadership of our new site services director, 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. We continue increasing our emphasis on new product development efforts to drive organic growth. We are driving efficiencies within our new product and innovation efforts. Through improved project selection at the group level, increased resources applied to fewer and larger revenue opportunities and a more disciplined and programmatic approach, bringing additional functions into our development efforts. All of these activities are now supported by a robust set of KPI to monitor and drive continuous improvement in our ongoing NPD effectiveness. Our engineering leadership team is now in place we've launched 7 new products in the first half of twenty nineteen, and we have 8 additional products launching in the second half of twenty nineteen. Turning to our operations excellence pillar. Our global operations teams lead our efforts to drive safe, organized, efficient, and sustainable workplace on our factory floors, in our offices, and at our customer site within our site services business. At the beginning of this year, we introduced our safety spots program, which includes representatives from all departments, regularly doing gimbo walks involving going to where the work is and looking for operational improvements as well as potential safety issues. Let me take a moment to provide just a few statistic on our year to date progress for the first half of twenty nineteen versus the first half of twenty eighteen. Our total number of lost time incidents has declined 61%. Our total number of lost days has declined 78%. Our first aid injuries have declined over 50%. And year to date, we've identified over 650 safety spots. Our electricity consumption is down 6% which equates to powering 100 and 44 UK Homes for a full year. Our water consumption is down 20%. And lastly, our CO2 emissions are down 11%. These are great metrics demonstrating the increasing level of efficiencies, safety, and sustainability we are driving in our operations. As we've now rolled out our road torque lean program to our largest facility, we've completed 28 rapid improvement events or RIEs in the first half of twenty nineteen. These emphasized either increasing production efficiencies or safety These 28 events yield £600,000 of hard savings in 2019. We expect to drive at least as many events in the second half of twenty nineteen. Depicted here is our factory in Shanghai, China. A shining example of where we've deployed the Rotorque lean program very effectively, totally reorganizing our production lines for flow, with the required sub assembly workstations aligned, and providing just in time sub assemblies to our main production line for the IQ series of actuators. This results in a reduction of work in process inventory reduce material handling and goods transportation, and a dramatic increase in our throughput. We continue to execute on our supply chain improvements, and we are on course to drive our committed £5,000,000 of savings in 2019. At the end of 2018, we kicked off our road torque inventory management program, and I'm pleased to say we're off to an encouraging start with just over 7% or £7,000,000 reduction in inventory in our 1st 6 months of the program. This, whilst increasing our customer service levels. Our inventory is down just over £14,000,000 on an H1 2019 to H1 2018 basis. In relation to our footprint optimization and our ongoing commitment to improve our cyclical resilience, we continue to execute well on our site consolidations. We've completed an additional facility closure in the first half, and our second facility closure of 2019 is in its very final stages. At the end of 2019, we will have reduced our manufacturing locations by over 30% in a roughly 2 year time frame. Let's turn now to our talent and culture pillar and our key enablers. We continue to strengthen our senior team With the addition of several members with the direct experiences and skills required to be successful in our growth acceleration program. After defining our vision, mission, and direction in the second half of twenty eighteen, our efforts transitioned to defining our purpose, values, and cultural behaviors in the first half of twenty nineteen. These efforts included participation from staff in 30 seven countries. Our new values of behaviors program formally launches company wide in September. Our company's purpose is keeping the world flowing for future generations. May recognize the first half of this statement, keeping the world flowing, which has been used by Rotor for many years. After debating a number of new and revised purpose statements, This one kept pulling us back. It's still a great description of why we exist. However, we felt it important to incorporate a second element for future generations. To reflect roadworks longevity and our intentions as a responsible company. The quality of the products and services we provide help reduce environmental risks while simultaneously providing life affirming fluids to those who need them. While we clearly have more to do, We've made significant progress in our diversity commitments over the last 12 months. I'm pleased to state that at least 20% of our PLC board, our management board, and our senior leaders population are now female. Turning to our 4th pillar, IT and 4 business processes. We continue to develop our capabilities in presenting management with clear and easily digestible information, allowing faster and improved decision making. In the first half of twenty nineteen, we've added to our business intelligence plat intelligence platforms, including global sourcing, innovation at NPD effectiveness and program management, and a global property dashboard, which allows centralized visibility to all our properties and leases in all regions of the Our focus in the first half of twenty nineteen has been on the design of our global blueprint for our chosen enterprise technology platform, Microsoft Dynamics 365. We've implemented our d 365 field service application in our UK service centers, and we'll roll this package out to North America in q4 of 2019. This common field service platform allows us to share infrastructure resources between sites and then 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, which are scheduled to go live in Q1 of 2020. I'll close out by summarizing our first half and making a few comments on our work for this year. In summary, I'm very pleased with the team's continued execution across our growth acceleration program. We've strengthened our management team. Our transition to a market oriented company is well underway. Our innovation and NPD efforts are accelerating. And our operations and supply chain organizations are delivering. We've launched our new purpose as a company and perhaps most importantly, Our recent company wide pulse surveys reinforce that we are bringing the company along in our journey. Turning to our outlook. Whilst macroeconomic uncertainty remains, with our recent order intake, the momentum of our growth acceleration program. We now expect to deliver flat sales on an OCC basis in 2019, with full year adjusted operating margin showing clear progress year on year. With this, Jonathan and I would be delighted to take any questions you may have. Good morning, Michael Blog from Investec. Excuse me, if it, if the clues are lost in in in your review of, progress so far. What is the expected timing now of the redevelopment of the bath site, please? It's a great question. I think it's going to be delayed sometime. If you think about when we started a couple of years ago, we were looking at a combined headquarters and manufacturing facility. And then what we found was the rate at which the company was growing, we were gonna outpace the size, for the location that we had. We then embarked on a plan to build a new factory separate of the headquarters, and what we're finding through our, aggressive deployment of lean within the bath facility, We don't need nearly as large of a site as we had envisioned as as recent as 6 months ago. So what we've decided to do is to take a pause while we continue the lean aggression within that facility and understand what our true needs are as we go forward. We want to really avoid building a a facility that's larger than we need. Just simply due to our efficiencies we're gaining in the operations. And strategically, do you see any, logic in reducing the amount that you're manufacturing in the UK for export? I would say not at this time. We still manufacture, products in all regions of the world, and our flagship products, we can currently manufacture in all three regions of the world. Thanks very much. Good morning, Kevin. Good morning, Jonathan. It's Ed Maravonic from Citi. I just had a question, I guess, end markets. What's the trigger for you to get those as yet concerning large projects over the line? And as a follow-up, where would you position your kind of current or oil and gas end markets relative to the previous cycle feature? I'll let Jonathan answer the the second part. I think we've talked before that it's not necessarily that that particular incentive level of that $50 to $60 a barrel we've talked about, but it's the stability in that. And once again, if you think about the first half of this year, we've had a highly volatile oil pricing. If you think about declines shifting, you know, 5, 7% in weeks, may we had a massive slide in the price of a barrel of oil. And I think what's interesting is that what's shifting in the oil and gas sectors. It's now largely related to demand, rather, I'm sorry, to supply rather than demand. And you have events like if you if you go back a couple of years ago, when when a ship in the Strait of Hormuz was attacked, you'd see a 7% spike in the price of oil that would stay there for days. You saw that this year for about 7 a half minutes, right? So oil spike for 7 minutes and then the market realized that the The threat of war in the Middle East is smaller as it relates to a price of a barrel of oil than the global trade issues we're facing, with China. And that's really how the market settled. That being said, that we've just seen this massive ups and downs in terms of a price of a barrel of oil. It's that stability that our customers ultimately want in order to say these projects should go forward. Over 80% of these projects are already sanctioned, They're in the FID program, and over 80% of these projects are profitable above those incentive levels we just mentioned. So it's it's really about The stability in that price and can these oil companies predict it'll stay above that level. And once we see that stability, I think those projects will get released. We do see some of those projects being split into smaller portions, such that the proportion of our midsize projects, if you will, are going up. But those large big programs that we had last year, I mean, think about last year in the first quarter, we talked about 3 programs, totaled £17,000,000. Those were not repeated this year. And I guess in terms of your second question Ed, in terms of overall value of sales to oil and gas in the current year versus versus peak. I think the rotor, we're probably at a fairly similar pound value, but the the shape of what those orders are and where they're coming from is quite different. And and the other big difference is the pace with which those projects work seeding at previous peak, you know, they were going through these approval processes much, much quicker. Now that's that's just not the case. So we have I guess, a greater proportion of smaller projects, the road talk is a different business from where it was at this peak in terms of our exposure to different pieces as well with, if we look at the product development and we look at some of the acquisitions since 2 14, we have a different exposure profile as well. Thanks. William Turner from Goldman Sachs. Clearly, you've done quite a lot on the operating efficiencies within the business. But going forward, do you see the incremental operational benefits that you can achieve as we can have smaller? How have you basically to consider you've completed the low hanging fruit. And then secondly, if we were to, for example, if you were some not grow for the next couple of years or into a low growth world, do you think you could hit your targets of the mid 20%, margin range just by all pricing efficiencies. So I think we're in the very early stages. So what you're seeing now in the results we've been able to provide in the first half for the very early stages of our programs. If you think about the inventory management program, we just kicked it off 6 months ago. If you think about lean in the operational improvement focus. It's only a year in. And as you would expect, the rate of adoption differs greatly within the that we have. It is somewhat of a normal distribution. You have pieces of the company that are truly embracing it and accelerating that and others that are further behind that are getting additional support and leadership from the operations teams that we've brought in. So I think we have several years of continuous improvement in our operations yet ahead of us. I think that's a statement I could make about operations. I think that, applies to our supply chain of procurement efforts as well. And I think when we've structured this program from the outset, internally, we said that at least 70 plus percent of that return has to be driven by discrete, identifiable, quantifiable management actions, not economics. So we embarked on this journey with the expectation that it's not just flow through on top line revenue growth that's gonna get us back to those margins. It's hard work and execution of management driven activities. And that's what you're seeing. So I think that we can go a very long way towards a return if in fact we are entering into a low growth environment still. Thanks. Thank you. Mark Davies Jones from Stifel. A few things, if I may. Firstly, you mentioned the impact of areas you can't sell. To now because of sanctions. Can you quantify what that was in the mix? Secondly, the margin pressure in gears related to the tariff issues You're not able to pass that on. Are you able to pass it on with a lag? What's going on in terms of selling that through? And then finally, midstream is obviously strong. You're talking about pipelines. There's a lot of new capacity coming on stream at the moment in the Permian. How long do you think the business remains robust for the year? Is that a bit of a peek at all? Do I take the first 2? Yes. In terms of the markets we're no longer serving, I guess they probably averaged around 1 percent of revenue for, recent years. So, that'll be the guide on that one. I think in terms of gears, tariffs and our ability to pass that on, I suppose the early part of the year there was a question mark around whether the tariffs would indeed increase or whether they were going to stay at 10% so that the plans in terms of how to mitigate that cost increase was, was another moving target to AMAT to some extent. Those tariff the third wave that do affect us have now increased to 25%, in April, and that's really the impact we're seeing at the moment. The mitigating actions to, deal with that are not really about passing price on because those price increases at that tariff impact doesn't necessarily all affect affect all the people we are competing within North America. So the mitigating actions really are with us and managing our supply chain, and that thought process underway, but it's not a particularly quick process to pick up tooling, find and qualify for safety and all those things, new supplies in other parts of the world, but those those activities are underway and will, impact next year more than it would this year. If I could add on, in our largest competitor in the gears is a company that operates out of South Korea. You can imagine they are not currently facing the same level of tariffs that we are with our gears manufactured in China. I think it would be, an unfair knee jerk reaction to go to our customers pass through that short term tariffs. I think we would risk losing market share on that, and I think as, I think we need to understand that we're gonna have a short term impact on those tariffs until we have more clarity over the longer term into the tariff situation. What we need to do. We do have an ability to transfer that manufacturing to other manufacturing locations. We have those plans, as you can imagine, documented written up, ready to go, waiting to see if that's a more permanent situation, then we will enact that and relocate some of that manufacturing to a different different low cost country, if you will, where we operate it. But I think it would be premature to go to our customers and ask them to take that hit relative to the alternative supply having that that price impact. I think there's a lot we can do within the gears business to continue to focus on improving the profitability of that business. They've been a keen focus of our lean operations, and we've just relayed out the entire manufacturing process for NETGEAR's business. That'll yield, I think, some substantial productivity improvements. So we're attacking it through our own operations programs first. While we wait out and see how long this tariff is gonna last. The midstream 1, the pipeline 1? Yeah. So the midstream is not only North American related Permian, to be clear. We're seeing midstream pipelines throughout, Eastern Europe, Europe, Asia. So pipelines in general are increasing, and, and largely not only the the oil pipelines in the Permian, but gas pipelines throughout the world are increasing force. So would say the Permian is a very small piece of what we're seeing. Hi, Tandy Wilson from JPMorgan. Couple, please. On the the site services business, it seems like there's quite a lot that you're doing in terms of reshaping some of your focus areas. Can you talk a little bit about what you're seeing in the market in terms of level of activity in terms. But also what, if anything, you're seeing this energy? So we haven't seen many changes from the competitive landscape. We're seeing growth, nice growth in our services business continuing. We're seeing customers willing to spend money in those pro on preventative maintenance programs in particular, as well as that turnaround spend. So That's a business that's still performing quite well for us. We're excited about that, but no real fundamental changes in the competitive landscape. Just thinking about internally, obviously, I think one of the previous questions was kind of alluded to how much is going on, which I think is is fair. And it seems that you might be running a little bit ahead in there with where flooring is going to be given I guess the guidance is more than 3 times this month. Can you give us a sense of kind of where I guess the rate of changes being quicker and and maybe linked to that, just how important there's been some of the changes that you've made in terms of people and, whether that be Can you just pull through it more generally or specific incentives? Sure. I think it all begins with the people. And we've imparted a significant amount of change on the company in that we've been able to attract, some talent into the company in particular in areas in terms of supply chain and operation, and you're seeing those results, very directly. That's probably the area of the fastest rate of change is the quick deployment of the road torque lean program, and then deploying that in our top 10 facilities, as well as supply chain, bringing in a supply chain group very effectively. Those are 2 new organizations to Rotor that have substantial amount of people brought in from the outside. That are driving that change down through the organization. So I think that's the fastest area of growth, HR is another area. Of fast growth where we've been able to shift HR from what was historically a transaction oriented, you know, where do I get my pay slip and need to get my benefits to truly, serving as a business partner. So going out and assessing and recruiting talent and looking at working with teams to identify the optimum structure of their team, which in some cases eliminate some layers of management, others increases fans of control, for example, that work. And I would say IT is probably the 3rd largest area of change, where we've brought in, certainly, Paul Burke, who has brought in to, to lead our IT efforts just prior to me coming on board, has done a phenomenal job shaping the IT program and giving us a great deal of confidence in the deployment of our IT platform. It's not lost that many of those areas of improvement are improving because of the additional talent that we brought into the company. Morning, Richard Page from Numis. Can I just ask on, end market mix? Cause I guess for a while, we've been waiting for Diversification wake up more than gas and moving to that. Umities. Is there any hinting or change in the order book or any product that we release in the market for this realignment about of the sales team around Denmark? Yes, absolutely. The purpose of realigning the sales organization around end markets is really about to balance our oil and gas business with some faster growing. You know, the rate of growth will be faster than some of our chemical and process and industrial pieces of the company. If you look at our new product development efforts, there's been a lot of development efforts targeted at those segments as well that launch this year. I think it's it's probably 30 to 40% of the products we're launching this year are targeting at those market segments that are not in the oil and gas. So I think the realignment of the front end focus with the additional new products targeting that will help us with that balance. But again, it wouldn't surprise me if 3 years were sitting here in 50% of our business is still oil and gas. It is the part of the market that we have the strongest brand position, the strongest specification. We have the best price yield, so it's a very nice segment for us to continue to operate. Sorry. Just to follow-up on the US Water, those opportunities gone? Have they No. Our US Water business is up this year. Substantially over prior years. So we do see the US water business just starting to return. If you think about last year in the first half, think it's the last year in the first half, it wasn't there. The US Water business was was very muted, and our team said, Don't worry bosses. We'll we'll get that back and the back half is gonna be great. Of course, we, we don't usually believe those forecasts, but they did. They came in and delivered a really strong path, which led to a nice overall pickup in the water business. Then again, the first half of this year, we're seeing a pickup in the water business in North America as well. Morning again, Michael Blogg from Investec. You say how much of the uplift in operating margin comes from IFRS 16, please? Very little indeed. It's, as we said, back in March, it's about a £250,000 increase. It's it's a tiny, tiny adjustment in terms of, E today. We can annualize that as well. Thank you. Ed again from Citi. Just asking on the on the news of market segment augmentation. What's the feedback? Is there any pushback or resistance from customers or from these alike? No. It's actually been really well received. We're very pleased. We do, our process includes a formalized feedback loop that we go back and talk to employees, customers, and that's gone very, very well. The feedback has been very positive. It this has been kind of a pent up desire of our customers for some time, And I think from our sales focus, our our sales team's focus, them understanding how they could drive value in the company is also resonating with So we've had no loss of customers, not a single resignation, of a sales individual as a result of this, so that's gone very well. So far. We're gonna continue to monitor that. And I think it's, I think as we get to Southern Asia and then Europe, Europe may be a little bit harder, to change some of that. But we'll continue to monitor that as we go. Certainly gonna be more complex when we get to the European model of the year. And just a final question on power markets, how are those? Is there any flicker of lights or lights there? No, I think as we said in the main decrease in power is split into 2 elements at a group level, you've got the sale of the new a nuclear activated business, we've also seen a decline in the other aspects of power, driven by, you know, lower levels of new build spending in thermal plants. There is still, you know, a good level of refurbishment upgrade stuff taking place in those facilities but it's just not at the levels we've seen in the past. Hi. Yeah. Mark Fielding from RBC. Obviously, you've got a reasonable amount of cash on your balance sheet. You're generating more cash. I'm assuming there's still no desperate rock from your side to to do anything with that. So Given this current uncertainty in the economic, backdrop, there is no rush to go out and and spend that. We we spent a lot of time in the first half of this year. As many of you know, we've we've brought on board, a new head of strategy and M and A. BJ Rao. BJ's joined us and we've spent a good part of the 1st 6 months really redefining the strategy for road torque as we go forward in terms understanding those most attractive near adjacencies. We're working on that, body of work, literally now. We're reassessing some of those candidates that we've had in our funnel, and we're gonna continue that. I think as, I think multiples are still fairly rich out there. There's a lot of still sitting on the sidelines, so we're gonna be very disciplined in our approach, and we're gonna ensure that those fit into our long term strategy for our shareholders. So no absolute desire to run out and do anything in the in the immediate term, but we're working on it. And it is going to be a part of our future, for sure. And secondly, you touched on, site services a couple of times, but, you know, how big do you feel now as you get more into this need to sort of unt have to ask them after presenting my video. Well, I think for us, as we define our aftermarket, it goes beyond the field service work that we do today. So if you think about the evolution into the the field service work that we do today. We're out there repairing on, again, on either a reactive or a preventative basis. We see that evolution We purposely have toned down our discussion about it until we actually are generating a significant revenue stream from that, but I will tell you that we do have now 7 sites up and running on that program. So these are either water treatment facilities in a couple of occasions, large fuel terminals, and a couple that we are running that entire site. And monitoring the status of their valves through that to be able to predict when they're gonna have a failure. So that's a program we're gonna continue to run, and that can be very substantial. Alternative business model as we go forward. I think in addition to the, to the aftermarket, getting smarter about our parts program and our repair kit programs and all those other elements of a robust aftermarket is what the team is focusing now in the near term. The team is kind of split, as I, as I mentioned in my prepared comp, between looking at our core processes and remapping those core processes, looking at the infrastructure, meaning if you think about in the UK, for example, we dispatch service in 5 separate locations. So we have 5 separate administrative people sending out service technicians. Now that we're on one common platform that we just launched this year, we've been able to reduce that to be able to dispatch service from one centralized location. That's the type of work that the team is working on now. Again, it's about improving the core process as we scale. So this, this 2 pronged approach to growth well as improving the underlying, profitability of the business. That's going to continue. I think the aftermarket business can be a substantial part of our portfolio as we go forward. It's certainly margins are accretive. Growth is accretive, and we're gonna continue to put resources behind that. There's major pieces of regions of the world that we could continue to grow that. Disproportionately. And that's where we're reallocating investment from other more mature markets to those emerging markets. Morning. It's, Robert from August A few questions. First one, you mentioned acquisitions, but what about disposals? Is there anything in your, in your current portfolio having had 18 months to sort of look over the business that you think maybe doesn't fit as well as you'd hope, or you, not as though 2 to 3 of you might fight an obstacle? Maybe a couple of small, non meaningful ones. Yes. As we continue to evaluate the portfolio, we're gonna continue to do that, on a on an evolving basis. And there certainly are small pieces of the business that don't quite fit with our long term strategy, but they would be fairly insignificant. And then, you put up a slide, I think, with 7 new products that you were bringing to market. How is the, evolution on your sort of R and D plans and the R and D spend in your original sort of draw about ramping it, meant that you, you could kind of cover it from the savings. You've got, where, where are you in terms of that, that side? So we have, we have we done in engineering and R and D? First, we realigned the organization, so now we no longer have divisional R and D. We now have a global R and D team. We've brought in every ongoing development activity in for a, kind of re review, kind of retoolgating everything in flight. And that yielded a reduction, a dramatic reduction in the number of programs in flight. So we killed about 65% of the in flight new product development initiative. Meeting, we didn't have confidence that they were going to hit the market, hit the return that we expect. Maybe they were an idea from an individual salesperson, We felt they weren't market driven, so we killed 65% of them, reallocated and redistributed the workforce to really get that remaining pocket of new product development over the line. We've remapped out our entire internal tollgate process and relaunched that company wide. And now we have tollgate meetings that 4 major programs involved the senior executive team that we sit around a room and validate that we want this major program to go through the next tollgate that we believe in this level of expenditure and program. So I think we've done quite a bit there, and that's going to continue. Our spend is down in the 1st half, because again, gaining those efficiencies, but I will tell you the output from that spend is going up. It's accelerating. And then, maybe just the last one. You put up a slide showing the number of sites you had globally coming down in the last couple of years. Is there a target for, road talk globally and then the or sales offices that you've got in mind at the moment? There is not one that will say publicly. Mhmm. That's a terrible idea for us, right? Yep. I, I think within the company, there are sites that have identified that have kind of understood that what we're looking to do is to increase our cyclical resilience. And those smaller sites that, that have a high cost of operating and will not get to our margin ambitions, that no sites understand that we're going to be working with them to consolidate and put them into a larger site. So I think within the company, there's There's a pretty good level of momentum. I'll also take a moment to say, I think I'm really proud of the team that are working on facility in terms of the people aspect of that. In, in our Tulsa, consolidation, 33 out of 35 of the employees, had new jobs before the site was finally closed. And in our Taunton facility, it's 100% of the employees had new jobs before we closed the site. So we're working very aggressively on making sure that we pay attention to that people element in the facility closures. And I think that's going really well and and maybe adding a bit of calm through the network of our facilities. Thanks. Just a final one for me. Could you say is there anything in the order backlogs in any of the divisions that point to significant movement in gross margin in the second half and next year, please? I suppose that the only thing I would say in there, Michael, is that Division by within a division, no, but clearly the divisional mix is slightly different in the backlog and where it was June last year. I think otherwise when you look within the divisions, there's nothing substantially shifting within One last question. Thanks. So the first one had 2 actually. 2 last questions. Okay. I can try and combine them into one that so the first one with Jonathan on delivery times. So you made a few comments about fewer projects, which a consumer with longer delivery times, but you've also got reduce your sales growth guidance for this year and say more next year. Can you it, Matt? Yeah. Both both in, controls and and in instruments, I made that comment because there are if you look at the the those are the 2 divisions which have the higher order book at June versus, June last year. And in both those, the pattern of the orders and when they fell in the 1st half, we just know that some of those are for extended delivery time frame, so we will see the deliveries on some of the subsea stuff and instruments into next year and some of the orders came into controls are already for delivery next year. So we track, at each month, the proportion of order book for delivery in the current year, and I can just see there's a a difference in those two divisions compared with 12 months previous. Okay. And the second quick one was on pricing. Quick word on pricing given. We've got some new products coming in, but I suppose that my understanding was always it's quite difficult to shift customers onto the new products for road talkers as location and things like that. So what what does it mean for pricing for these new products and, I guess, for the legacy products? But we always set the new product pricing, as you can imagine, with the product life cycle curve, higher than the products that they're replacing. But many of the products that the new product that we're launching now, are really about protecting our premium price position. So if you think about the, some of the new targeted water applications. That's really about providing the market an alternative to an Alma actuator at a price point that makes sense to compete with an Alma actuator so that we don't use our IQ 3 premium position product to compete. It's about creating that firewall that says this is an absolute different premium product. And if you want that, you have to pay But we're not going to sell you this to compete with an Armada that is a key featured product down at this level. So I think a lot of our our thinking in some of the new products we've launched have been to drive price yield in terms of protecting our IQ premium positioning, as well as providing alternatives to those others in the marketplace. Outside of that, if you look at the the new product slide and you think about the gear set that's pictured on the bottom, in the center, That's really about optimizing a gear set that would allow us. This answers that question of some of the things we're doing to to contend with the tariff piece. By redesigning that gear set and optimizing it, we're able to, in some cases, scale down an entire size classification of that to compete, more effectively at a better price point with some of the others that are out there in the gear set. So we're doing some some activity to increase our price yield, increase our margins, not just, you know, coming out with products at a lower price. That's not at all our intention. Great. Well, thank you everyone for your time today. I'm sure see some of you on our tour as we balance out the week.