Good morning, everyone. Thank you for joining us as we discuss our 2024 first half results. Alongside me is Ben Peacock, our CFO. I'll start today's presentation with my highlights of the period. We delivered a strong start to 2024, building on the excellent momentum established in the second half of last year, and I'd like to thank all our staff for their hard work in the first half. Group sales grew 11.6% on an OCC basis, with oil and gas and water and power sales 20% higher year-on-year. CPI sales were lower, largely due to the result of non-repeat mining projects. Overall, I'm pleased with our target segment approach, which delivered sales growth above the group level. RSS contributed 22% to group revenues and again grew faster than the group overall.
Operating margins increased almost 200 basis points to above 21%, returning to the levels typically seen in the first half pre-COVID. The increase in margin reflected the higher sales and good operating leverage and was achieved while making Growth+ related investments. Return on capital employed rose year-on-year and was close to 37%, demonstrating the value creation potential of the business. Cash conversion in the period was good, leaving net cash at GBP 119 million, a little lower than at the end of December, despite having spent nearly GBP 20 million buying back shares. Safety remains the top priority at Rotork, and we once again delivered a year-on-year improvement in our total recordable incident rate. We launched our Growth+ strategy 2 years ago, designed to deliver our ambition of mid- to high single-digit revenue growth and mid-20s operating margins over time.
We are now seeing its impact, both in terms of accelerating sales and in delivering higher margins. The next couple of slides highlight some of our target segments and some of the innovations we have made recently to deliver our ambition. The target segment approach is a key pillar of our Growth+ strategy and has already served to reignite revenue growth at Rotork. Target segments are markets we have identified which offer significant profitable growth opportunities. Our divisional teams, with a commercial and business development approach, are responsible for selecting their target segments and executing growth within them. We encourage our teams to be agile and to continually seek and develop new target segments to build on our growth momentum. This slide shows our estimates of the market size of the target segments within each division, together with our estimates of the market growth rate.
Overall, target segment sales represent around half of the group currently, and we estimate the combined market growth at high single-digit, giving us the platform to deliver our revenue ambition. Examples of our target segments include the electrification of Upstream and Midstream within oil and gas, Critical HVAC control for technology sectors within CPI, and the automation of water infrastructure globally within Water and Power. I'll now highlight some of these examples in action over the next few slides. The first target segment I'd like to highlight is the electrification of Upstream and Midstream. The oil and gas industry is committed to halving its Scope 1 and 2 greenhouse gas emissions intensity by 2030, with one of the key levers being electrifying Upstream and Midstream processes.
The IEA calculates that oil and gas electrification is one of the lowest cost ways to reduce global greenhouse gas emissions of any activity in any sector, hence representing a great opportunity for Rotork. The momentum in electrification is building. We are now seeing this in areas outside of North American upstream, including into midstream pipelines and other geographies. Having already had good success within wellhead chokes in North America, we are now gaining traction in other upstream process stages and have won the first orders for electric actuators used in well completion, a new and emerging target area we highlighted at this year's prelims. We are also seeing strong momentum in pipeline electrification, with a significant pickup in orders and inquiries in both Asia Pacific as well as in North America. As I've mentioned, the increase in activities within this target segment is not just in North America.
We're seeing it in various parts of the world with business wins in Europe and Australia and across a broad range of Rotork electric and electro-hydraulic actuators, expanding from the original success of our IQTF product. In summary, we're very excited about the electrification potential of our oil and gas division. The emerging new segments in upstream, midstream, as well as the expansion into other geographies, provides Rotork with further structural growth opportunities in addition to the already identified potential within upstream wellhead and production processes. Putting the opportunity into perspective, our upstream and midstream electrification sales grew strongly in the period and represent around 8% of group sales. Innovation, the third pillar of our Growth+ strategy, is at the heart of what we do and plays a key role in supporting our customers in their emissions reduction journey....
Traditionally, oil and gas customers have used fluid power actuators for emergency shutdown applications on wellheads and pipelines due to the fast closing and high torques required that an electric actuator cannot deliver. However, these products vent gas when operated. To solve the problem of delivering the required shutoff speeds at high torque, while eliminating the need to vent processed gas, we've engineered a modular electro-hydraulic actuator range, combining the simplicity of electric operation with the speeds and high torque of hydraulics. Essentially, the best of both worlds. The product can also be used in applications requiring high safety certifications, and very importantly, can be retrofitted onto existing fluid power actuators. The electro-hydraulic range is an exciting addition to our product portfolio, with a strong competitive advantage for our customers looking to eliminate methane emissions from safety shutdown valves on wellheads and pipelines.
The second target segment I'd like to feature is Critical HVAC within CPI. CPI has delivered low double-digit sales growth since its inception in 2020 up to 2023. Whilst its sales slowed in the first half, largely due to non-repeat of mining projects, we remain confident that CPI will deliver good levels of revenue growth over time. A growth driver within CPI is Critical HVAC, with revenues growing in line with the group in the first half. Critical HVAC covers a number of niche critical process automation segments, which we believe offer the potential for exciting growth. These are structurally growing markets where we have a compelling product offering and, in many cases, the opportunity to gain share. Examples of Critical HVAC markets include tunnel ventilation, battery storage, data centers, and renewables, for example, in the solar panel manufacturing processes.
Rotork products have important applications in air quality and precision motion control, as well as in cooling. Our products are typically used in critical applications where certified explosion-proof products is required. The third target segment I'd like to highlight is water and wastewater. Fresh water is a critical commodity and a scarce resource, and demand for it is growing, driven by megatrends such as population growth and urbanization. Additionally, the water industry is facing a number of challenges, necessitating increased investment, for example, to improve water quality, reduce leakage, and adapt to climate change. Rotork products and services are used widely by the water industry to help automate processes, including in infrastructure, wastewater treatment, and in desalination. We are firmly of the view that our competitive position in water has been strengthened in recent years through our strategic initiatives.
We've seen new business in certain geographical markets and product segments where we have previously been less present. We've benefited from our sales force realignment, improving our lead times, new product launches, which I'll touch on in a moment, and leveraging our Site Services capabilities. Our water segment sales have grown close to 10% over the last 3 years, and we remain confident of continued growth in the future. One product family I'd like to highlight is the Rotork Battery Backup Actuator, or BBU. The BBU was launched a couple of years ago and has proved very successful across a broad range of applications, including in water markets as well as in oil and gas. The BBU opens up automation opportunities for electric actuators.
Its unique selling point is that it's an electric actuator that can continue to operate even if power fails, allowing the user to move the valve it controls to a safe position. The BBU is simple to install and operate, and zero emissions when powered by renewable energy. It can be used in new installations or to replace existing manual controllers. As I've mentioned, we've seen strong demand for the BBU from the water industry. For example, automating outlet valves on water treatment plants. We've also seen excellent take-up of the product from the upstream oil and gas segment for wellhead safety shutoff applications, as well as seeing new energy applications for carbon capture products and offshore wind platforms. Overall, a fantastic product, creating new valve automation opportunities within multiple markets.
That completes my first section, and I'll now pass over to Ben, who will take you through the financials before coming back to discuss the outlook.
Thank you, Kiet, and good morning, everyone. Before I go through the numbers, I would just like to take the opportunity to say how delighted I am to join Rotork as CFO. It's a privilege to join a company with such an excellent financial profile, great products and market-leading positions, strong culture, and supported by a great team. I would also like to take the opportunity to acknowledge the great work of my predecessor, Jonathan, who's laid strong foundations across the finance function for me to build on. I would also like to thank Jonathan for his support during my transition to Rotork. If we now turn to the numbers, orders received were marginally up on prior year on an organic constant currency, or OCC, basis, despite the prior period including an unusual number of large orders. Additionally, orders were 4% up versus revenue.
Oil and gas and water and power orders were slightly higher, while CPI orders were slightly lower. Revenue, at GBP 361 million, is 8% higher than prior year on a reported basis, and just under 12% ahead on an OCC basis, with oil and gas and water and power revenue well ahead and CPI modestly lower. Currency was a headwind and decreased revenue by GBP 14 million. Rotork Site Services performed well, with revenue once again growing faster than the group, and its contribution to group revenue in the first half has increased to 22%. Adjusted operating profit of GBP 76 million is 17.1% higher versus prior year, and margins are up 170 basis points at 21.2%.
Return on capital employed rose over 4% to 36.9%, reflecting the increase in operating profit, whilst adjusted earnings per share at 6.9 pence is an 18% increase on H1 2023. Cash conversion was 106%, and we closed the period with net cash of GBP 119 million. The share buyback commenced in the period, and by the 30th of June, shares with a value of GBP 18 million had been purchased and canceled. Finally, reflecting our confidence in the outlook, the interim dividend at 2.75 pence is 7.8% higher than the prior period. If we now turn to the divisions, and starting with oil and gas: Revenue grew 20% OCC, driven by the EMEA and APAC regions. We saw growth across all sectors, with downstream growth particularly strong.
Within target segments, we made good progress in oil and gas upstream and midstream electrification, with especially encouraging progress in the midstream. Downstream sales now represent 53% of the total, upstream 24%, and midstream 23%. Adjusted operating profit at GBP 39 million is 29% up on an OCC basis. With strong volume growth, operating margins increased 140 basis points to 22.8%. If we now move to CPI, revenues were 6% lower year on year on an OCC basis. The decline followed 3 years of strong growth and was largely the result of reduced mining project activity. Within target segments, we saw solid growth in chemicals and critical HVAC. By region, EMEA sales grew mid-teens, with all sub-regions higher and the Middle East and Africa performing particularly well.
Asia Pacific sales were modestly lower, despite good growth in India, while America sales were lower due to reduced deliveries to mining customers. Adjusted operating profit at GBP 24 million is 3% lower than prior year. Despite the lower profit, adjusted operating margins rose 80 basis points to 23.5%. The higher margins reflected positive price mix and good control of costs. If we now turn to water and power, revenue in the first half was ahead 20%, with both water and power sectors growing at similar rates. The target segments of water infrastructure and desalination grew strongly. EMEA was water and power's fastest growing region in the period, while APAC sales were ahead mid-teens, with the Water For All initiative driving very strong revenue growth in India. America sales also grew solidly, with Latin America particularly strong.
Adjusted operating profit at GBP 24 million is over 50% higher year-on-year on an OCC basis. The increase in volumes, changes in product mix, labor productivity, and improved materials pricing have resulted in adjusted operating margins increasing 510 basis points to 26.9%. These margins are commensurate with the margins achieved in Water and Power pre-supply chain challenges. If I now move to the profit bridge, volume, price, and mix have contributed to increased profits in the period, with higher volumes the greatest contributor. Price increases have returned to more normal levels, and together with a favorable shift in product mix, have more than offset the increase in people costs.
We have seen strong operating leverage on the higher volumes, which has led to increased margins, with adjusted operating margin 170 basis points higher at 21.2% in the period. If we move to cash, we started the year with net cash of GBP 134 million, which reduced to GBP 119 million over the period. Working capital was a small inflow in the period, even with the strong growth in revenue. Net working capital as a percentage of sales reduced from 27.3% in December to 26.4%. Other items include further investment in our business transformation program, and employee benefits were higher year on year due to increased bonus payments.
The strong cash generation has funded GBP 58 million of returns to shareholders through the GBP 40 million 2023 final dividend and the GBP 18 million share buyback. Our capital allocation policy is unchanged. Our priorities are organic investment, progressive dividend, M&A, and returns of capital in that order... If I now move to the items below operating profit in the income statement, similar to last year, the majority of these items relate to investment in our business transformation program. A further GBP 7.6 million was incurred in the period, implementing the new ERP system and the associated systems and processes. The European rollout continues, with implementation progressing on track at several plants. Finally, we incurred some costs relating to the relocation of our China manufacturing facility. If I move to tax, tax rates have moved slightly higher this year.
The headline effective rate and adjusted effective rate have both increased 80 basis points to 25.3%. Higher UK tax rates were the largest driver of this increase. If I now turn to the full year guidance, we anticipate FX to be around a 4% headwind. CapEx is expected to be around GBP 15 million, and the investment in business transformation and ERP is expected to be GBP 20 million, and the China relocation is estimated to cost GBP 5 million, with both of these investments being expensed below adjusted operating profit. In summary, the outlook for our end markets remains positive. With good order intake in June and July, our order book provides good revenue visibility into H2, and under Growth+ , we expect 2024 to be another year of progress. I will now hand you back to Kiet.
Turning now to the market outlook, starting with oil and gas. It is increasingly clear that hydrocarbons will have an important role in the world's energy mix for years to come. The industry continues to invest to drive productivity, provide energy security, as well as electrify operations to reduce greenhouse gas emissions. The electrification of upstream and midstream operations has become an increasing priority, and we have seen a clear step up in pipeline electrification, the first activity in well completion, as well as adoption in regions outside of North America. Within LNG, we continue to expect a pickup in activity over the next 12-18 months. We consider the outlook to be positive, and while still mindful of macro and geopolitical uncertainties, we expect further growth in oil and gas sector activity.
Moving to CPI, we consider the critical HVAC market to have a positive outlook, driven by structurally growing markets such as tunnel ventilation and data centers. While the bulk chemicals market has been sluggish, CPI has increasingly focused on specialty chemicals such as green ammonia and methanol, where the outlook is more positive. We continue to believe that CPI has plenty of opportunities to win share in its target segments and also in particular markets where it has historically been underrepresented. As a reminder, the division faces easier comparisons in the second half. Last, by no means least, Water and Power. The global water sector is firmly in investment mode, building new and modernizing existing infrastructure, as well as managing climate-related changes and potable water shortages. Efficiency and digitalization remain key focus areas.
The power segment within Water and Power experienced increased activity in 2023, which carried on during the start of 2024. Looking forward, we see good prospects for emissions-related spend, including Carbon Capture and Storage, and for renewables such as offshore wind platforms. The outlook for the traditional power market is more positive than it has been for some time. This improved outlook is driven by the energy security, Electrification, and general economic growth. In summary, Rotork is a first-class engineering group and market leader with a strong purpose: keeping the world flowing for future generations. We have a fantastic product and service offering, with a great opportunity to create value for all stakeholders. We have a major role to play in the transition to a low carbon economy, as well as helping preserve natural resources such as fresh water and eliminating energy sector methane emissions.
The benefits of the Growth+ strategy are increasingly apparent, enabling us to deliver double-digit OCC revenue, profit, and EPS growth. We have also delivered strong first half margins and finished the period with net cash of GBP 119 million, giving us the capacity for further bolt-on acquisitions and to continue our share buyback. To finish, the outlook for our end markets remains positive. Order intake was encouraging in June and July, and our order book gives us good visibility. Our full year expectations are unchanged, and we continue to anticipate 2024 to be another year of progress on an OCC basis. Thank you again for your interest in Rotork. We'll now open the lines for your questions.
Thank you very much. To ask a question, please press star followed by one on your telephone keypad now. When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind, please press star followed by one. Our first question is from Andrew Douglas with Jefferies. Andrew, your line is now open. Please go ahead.
... good morning, gents. I hope you can hear me. I've got a couple of questions, two for Kiet, two for Ben, but they're nice and quick. For Ben, can you just talk about working capital? Working capital as a percentage of sales going down, that's good, despite strong growth. And I think we're now at 26.4%. What is the right number for Rotork on a, let's call it midterm basis? And, you know, you've now got your feet firmly under the desk, you're in control now. What have you found inside Rotork's finance function? What do you need to improve, and kind of where to focus? And then for Kiet, can you just talk us through the large order outlook?
I know we had no large real orders in the first half. Just kind of, is that due to come back? And on the wellhead well completion, can you just talk about what it was that actually got the customer kind of over the line? And once one customer is now, you know, on board, do we see their competitors kind of having to get involved because they're kind of, you know, losing market share from an ESP perspective or what, what are you going to share with us? Thank you.
Okay. Thanks, Andy. Really good to see you. I hope you're well. I think I'll hand over to Ben to answer your first question.
Yeah, thanks, Andy. So on the working capital point, we do have a small inflow in the period. As you'll have seen, there's an outflow in terms of inventory, but we had better receivables and payables. I think, look, could we see an improvement in inventory going forward? I think, yes, that's a focus for me going forward. In terms of giving you an absolute number, in terms of working capital, where it could actually get to, I think, you know, in terms of, give me a bit more time, and I think I can come back to you on that particular thing as we go through the business transformation program.
On the second point, just in terms of the finance function, what we found, I mean, as you know, Jonathan was in the seat for, you know, 14 years, did an extremely, you know, great job of building the finance function up. I think it's a broader point in Rotork, which is, you know, systems and processes, how we can simplify how we do business with ourselves, how we can simplify how we do business with our customers. But again, I think as you go through the business transformation program, a lot of that will be taken care of. So I think a lot of great work in terms of foundation that Jonathan's left behind. But again, for me, it's really about how do I support Kiet and the rest of the team to really capitalize on, on the Growth+ opportunities.
Yeah. Thanks, Ben. I think in terms of the large project orders, I think the way to look at it is in 2023, H1 2023, we had an unusually higher amount of large project orders, whereas in H1 2024, they've come back down to what I would call usual levels. So I wouldn't see it as them going away. I think this year is a more normalized number. Just, you know, just in ratio, we had almost a 2-to-1 ratio between first half of last year and the first half of this year. Then in terms of well completion, you know, we highlighted at the prelims, we're looking at other stages of the upstream process, and one of them being the completion stage. There's a movement towards electrification in that space.
So we've won a large order with a customer to fully electrify their whole e-frac platform. So these are typically, in the past, hydraulic actuated actuators and valves, and this company has produced the first all-electric e-frac. So what that gives you is, they've saved on all of the power required for hydraulics. They talk about easier or lower cost of ownership over time, so cheaper to run, easier to control, and, and a reduction of actual infrastructure costs in terms of the build of the whole platform. So you know, they, they actually save miles and miles of hosing, for example. So whilst the cost of the units in terms of the electric actuators are, are higher, they're saving overall in the total cost of the build for, for the platforms. So I hope that answers your question, Andy.
Yeah, perfect. Thank you very much. I'll jump back to the queue.
Thanks a lot.
Thank you. Our next question is from Lushanthan Mahendrarajah with JP Morgan. Lush, your line is now open. Please go ahead.
Hi. Good morning, guys, and thanks for the presentation. I've got a couple of questions if that's all right. The first is on orders. I mean, is there a way to sort of quantify the excess orders last year from large projects? I try and get on sort of the question of sort of the underlying order order runway ex-large projects, and I guess sort of a follow on from that. I don't know if you can quantify what June and July were at from an order perspective. And then the second is on CPI, and at the full year results, you guys gave us a sort of very helpful slide of sort of the end market breakdown. Just give us a bit of color around metals and mining and chemicals and critical HVAC.
Would it be possible to get a bit more color on some of the other end markets as well and how they fared in the first half?
Yeah, thanks a lot, Lush. It was quite hard to hear you, so I'll try and answer the questions. I think if you look at the orders in the first half of last year, as I said, we had an unusually high number of one-off orders, and one-off orders over GBP 1 million. So the ratio was almost 2 to 1. But despite that, into this year, you know, we've seen orders marginally ahead. What we also saw last year was because of our longer lead times, so last year we had longer lead times in terms of our component parts, our PCBAs, and because those were longer lead times, we had longer lead times on our products.
What we saw was orders moving into the H1 for revenue due in the H2 so that customers could guarantee that they would get their deliveries as soon as they wanted them or when they wanted them. What we're seeing this year is lead times are going down. So for example, out of our Bath factory, an IQ in the first half was around 16 weeks of last year. This year it's around 6 weeks. So the lead times are a lot lower, so what we're seeing is a normalization of the orders, and customers placing orders a bit later because of our lead times. I think that's the dynamic in terms of the orders between H1 last year and H1 this year.
In terms of CPI, I mean, CPI has grown circa 11% CAGR over the last three years. We think, you know, over the next three years, it will still be a strong contributor to Rotork's financial ambition. What we've seen this year is a pause, I would say, largely due to nickel mining projects that came through in the first half of last year. We didn't see any more projects into the second half of last year, so we see comparisons being easier as we go through. The other areas of CPI, as I've highlighted in the presentation, HVAC has grown in line with group revenue, so circa 12%. Chemicals has also grown to that degree as well. So underlyingly, we're very confident in CPI and the cl...
You know, the reduction this year were due to the one-off mining projects. Do you wanna-
Yeah, I'll just add to that, Lash. I think when we say mining, it's specific to nickel.
Yeah.
We've actually seen, you know, good growth in both copper and gold in Latin America, and also decarb as well.
Okay. Thank you, guys. Very clear.
Thanks a lot, Lush.
Thank you. Our next question is from Jonathan Hearn with Barclays. Jonathan, please go ahead.
Good morning, guys. Just a few questions from me, please. The first two are just on the electrification. So, I don't know if it's possible, just in terms of that 8% of sales from upstream and midstream electrification in the first half, can you just give us a split between what was midstream and what was upstream? And then secondly, just in terms of that sort of, I suppose, midstream electrification opportunity, can you just sort of quantify, give us a little bit of color, maybe, you know, in terms of the potential addressable market, in terms of actuators that could be replaced there? Those are the two on electrification.
Thirdly, just in terms of the order book, the question there is just really just in terms of the mix of the order book. As we look to that H2, is that mix of that order book getting better? Have we got more electric actuators coming through? And ultimately, on the back of that, can we assume that the margin of that order book is improving? Thanks.
Okay. Thanks, Jonathan. If I take the electrification questions, I'll hand over to Ben to take on the order book question. I mean, as you know, the electrification initiative for us in oil and gas has been a key driver for us and has been a key driver for growth within oil and gas. Initially, we targeted the upstream methane reduction, because if you look at eliminating emissions, where you would Pareto first or where you would start first is at the wellhead to reduce the maximum amount of methane emissions reduction. That's where we're focused, and we've done well, and we've made really good traction at the wellhead. Since then, we've looked to develop further opportunities at the upstream stage.
I talked about winning our first project in terms of the completion stage, so that was really good and really positive. In parallel to all of that, we've already been seeing midstream opportunities to reduce methane, and that's because of the same technology used in upstream. In midstream pipelines, you know, the operators are using pneumatic-operated valves that use the process gas, and now they're looking to replace those with electric actuators.
It's, it's actually quite a new market, so we haven't completed our deep dive market study, but in time, like we've done with the upstream, we'll share the sizing of the markets, but it's very new at the moment, and so we're still in terms of scoping out the full market potential, because that's not just concentrated to North America. We're actually seeing the midstream opportunities globally across all the regions, especially in Asia Pacific as well. So we'll come back to you in terms of the market sizing. In terms of the rough percentages, we haven't disclosed the upstream split and the midstream split, but in totality, it is 8% of our group revenues for both.
Do you wanna, do you wanna cover the order book?
Yeah. Hi, Jonathan. So just in terms of the mix, and again, I know you asked about the order book, but just while we're talking about mix, you'll have seen on the revenue side as well, between H1 last year and H1 this year, there was a big shift in the mix, which obviously helped the margins. But as we are actually going into H2 now, the mix in the order book is not that different to what we actually had coming into H1. Clearly, there's still some book and ship orders that we need to do in quarter four, which may alter that, but at this point in time, there's not a big shift in the order book as we see it.
Okay. That's clear. Thank you very much, guys.
Thanks, Jonathan.
... Thank you. The next question is from Max Yates with Morgan Stanley. Max, your line is now open. Please go ahead.
Thank you. Just good morning, everyone. Just my first question was on pricing. Could you just give us a feel of what your pricing did and sort of how you're expecting kind of that to trend into the second half? And I guess my other sort of question to do with pricing is we've seen some companies where they've started to put up prices earlier, kind of ahead of their costs, and then we've kind of had costs catching up. Are you sort of seeing your price rises as kind of commensurate with the cost increases? And are you confident on kind of keeping that gap between price and cost as we go into sort of 2022 second half and 2025?
Yeah. Morning, Max. Thanks. I'll, I'll hand over to Ben to answer that one.
Yeah. So Max, just in terms of you, you will recall maybe in 2022 and 2023 in terms of price, 2022 price was pretty much 2/3 price, 1/3 volume. In 2023, it is 1/3 price, 2/3 volume. In the first half of this year, it's more like 20% of the increase in revenue is priced about 2.5%. It was GBP 8 million as you look at the profit bridge. In terms of for us, I mean, I think pricing has just got back to a price increase. It's just getting back to normal levels. As you know, we do have price and power, and where we see costs coming through there will be passed on, you know, to our, to our customers to make sure that we cover that.
But in terms of for the second half of the year, we're not anticipating any further price rises to go through.
Okay, that's helpful. And I guess if you look across your sort of end markets, and I appreciate in kind of each of the divisions, there's even kind of sub-end markets within the divisions. I guess I'm just curious, when we think about the sort of organic growth going into 2025 in terms of revenues, where do you see kind of the potential for which or which end markets do you see the potential for, I guess, slowing activity? And which of your end markets would you say are kind of the ones where you've seen clear weakness kind of this year or maybe last year and this year, and where there's kind of most scope for recovery?
I guess I'm just trying to gauge kind of what's accelerating or decelerating if we kind of or what's clear, most clearly decelerating and accelerating if we break it down into your kind of sub-end markets.
Yeah, okay, let me go through. I think, as I said in the outlook, I think we're positive about our end market outlooks. I mean, in oil and gas, we see a continuation of the momentum in our upstream and midstream electrification. We're making good traction there. LNG, we expect to come through next year. We're a bit later cycle, so we'll expect LNG to come through. This year, we saw a significant downstream improvement. That is a combination of growth, but there is a degree of catch-up in the downstream. So whilst downstream is gonna continue to grow, this year has been quite a nice, well, large growth due to some degree of catch-up in there. So we expect oil and gas to continue through into 25.
I would say Water and Power, very similar. You know, water has consistently grown, and you can see on the presentation, water has grown roughly 9% CAGR over the last three years. We expect continued investment in the water markets in terms of infrastructure to improve water quality or water distribution, as well as desalination. So again, we expect positive momentum going into 2025 with water. The power markets for us, and especially the traditional power markets, they have been a drag to the Water and Power sector over the last few years. However, they returned in 2023, and we expect them to be positive. Well, they are positive in 2024, and we expect that trend continuing due to energy security risks. So we expect that to continue into 2025.
So water and power, I would say, continued momentum overall in both water and in power. CPI, you know, there, there's some elements in there. As I've said, the HVAC element has continued to grow strongly through this year, as well as chemicals, through our target segment approach, and I think our Growth+ strategy overall is delivering across all three of the end markets. Like we said, we think the mining, well, specifically the nickel mining projects have been pushed out, so we'll see where they go. So CPI should come into easier comps, and then going into next year, we still expect that to be, you know, a strong market over the medium to long term. So I think that's our view, that's our view of the end markets.
I would say overall, a positive across the three.
Okay, that's helpful. And maybe just a very quick sort of final one. I think kind of on your site services, you had sort of what looks like a very strong first half above kind of average group growth rate. Could you just talk through, was there anything in particular that your customers were doing preparing their kind of facilities for higher activity or anything like that? Or is this really a function of kind of your internal initiatives? I guess, was there anything specifically from the customer side that caused this very healthy growth rate, or is this really kind of your initiatives?
No, I think-
...
Yeah, good question. I think-
Yeah, that's the question.
... Yeah, I think for us it was generally our own initiatives internally. We've talked about RSS being a key growth driver for Rotork across all of the end markets. And, you know, we are trying to drive RSS sales ahead of the group revenues, and they're coming through. So we've introduced initiatives such as what we call our lifetime management. So we've introduced the Intelligent Lifetime Management technology. We follow up with that, driving additional service revenues. We look for better attachment in terms of when we're selling our products, to try and sell the service with it. Obviously, that's a little bit different because we're selling to the valve makers. So what we try and do is go to the end users and sell the services to the end users.
Through all of those initiatives, we're growing RSS, and that's on the back of the market uptake. The RSS growth is on the back of the target segment growth within all three of the divisions.
Okay, that's great. Thank you very much.
Thanks, Max.
Thank you. Our next question is from Andrew Sims with Berenberg. Andrew, your line is now open. Please go ahead.
Thanks. It's Andrew Sims from Berenberg. Just a first question, just on the power side. Where is this coming from? You referenced the US, but what is the geographic split of that growth you're seeing? And I suppose in addition to that, what are the technologies? I'm guessing most of it's gas, but are there any signs of nuclear pickup in that part of the business, obviously, on the traditional power side? Any color there would be appreciated. I suppose partly related to that, on the margins of Water and Power, I interpreted your comments about margins going back to where they were, previous supply chain challenges as probably meaning, you know, those margins being back to where they should be.
But is there anything else in the mix which could change that with power, you know, in influence that quite a bit, or is there anything that can reverse within that margin going forward? Thanks.
Okay. Morning, Andrew. Thanks for your question. I'll cover the kind of power market, and then I'll hand over to Ben. I think in power, where we were strong traditionally is in the traditional fossil fuel markets, you know, gas-fired power plants, flue gas desulfurization, those types of markets. We saw those markets decline in 2021, 2022, and I think, however, since the conflict in Russia, Ukraine, we've seen an energy deficit, we've seen energy security risks, and therefore, what we've seen is a return of those traditional power markets come back on. What I would temper is actually, you know, within the water and power division, water has grown very strongly. So water is about two-thirds, power is about one-third of the market.
So that's traditional power coming back on stream. In addition to that, we are looking at new energies as well. So we've got projects in decarbonization, projects in terms of power, so waste-to-energy power projects, offshore wind farm projects, but they're relatively small, relatively nascent at the minute, but they're emerging target segments, which we're really looking at to take on kind of the energy deficits as we go forward in terms of new technologies within energy.
Within nuclear, we play outside the containment, but there's not that much nuclear sales within our portfolio. In terms of the mix, I think I'll hand over to Ben to talk to you about the mix of-
Yeah. Hi, Andrew. So, and again, I'm glad you picked up on the point whereby, you know, the margins in Water and Power are really just commensurate with what we saw in 2019, 2020, and 2021. I mean, the margin was around between 26% and 28% during that period. And again, given the proportion of electric that is in Water and Power is probably disproportionately affected by the supply chain challenges, particularly on the PCBs. In terms of your question going forward, there's nothing really that we're seeing, if I look at the order book, that we'd see that mix really changing dramatically going forward into the second half of this year.
Yeah. I think if I can add as well, I think in water and power, about three-quarters is electric in terms of the product range. So the way you look at the mix is not really water or power because we should really look at it from a product mix standpoint, because we sell products at the same or very similar prices across all of the end markets. So it's really to do with a mix of the products within the division. We don't see much of a mix changes, as Ben said.
Thank you. And then just, just to follow up on that, you, you referenced in the statement that, water and power grew at a similar rate, which I'm assuming is around 20% on an OCC basis. So I suppose in the first half, what was driving that? Is it, is it the traditional side, or is it some of the, the more, the newer energy side, I suppose?
It's the traditional side, returning back on the power side.
Yeah. Okay, fine.
Yeah.
Okay, great. And then, just a quick follow-up. You called out freight costs on the profit bridge. What are you seeing there? Is that getting worse? Could that create larger challenges just around supply chain and availability and things like that?
On the GBP 4 million, on the freight cost on the bridge, Andrew?
... Yeah, and that, that's obviously gonna-
Yeah, so on.
Continue to be a challenge, but is it getting worse? Do you see the money in this one?
No, look, I think if you look at, just, you know, container rates year-over-year, regardless of which route you look at, whether it's from Shanghai to Los Angeles or out of, you know, Rotterdam into New York, you know, freight rates year-over-year have gone up. So the GBP 4 million really, I look at it as probably one third is volume and two thirds really just an increase in rates overall. But just in terms of supply chain itself, I mean, from our perspective, as Kiet said, you know, our lead times are coming down to six weeks and no challenges with the supply chain.
Okay, great. Thanks, Ben.
Thanks, Andy. Do we have the next question?
Thank you. Our next question is from Mark Davies Jones with Stifel. Mark, please go ahead.
Yeah, Stifel. Hi, morning, both. Two, please. There's been a lot of focus on orders, but can I just talk about revenues and phasing of revenues? There's obviously still some catch up going on in what you're shipping through, which you couldn't previously because of the supply chain things. Can we just have an update on how advanced that process is? Has the supply chain fully normalized? Has that catch-up all come through, or is there still some effect of that to come through the second half? And then the second one was just around this very strong electrification story within oil and gas. Is there any risk of a temporary slowdown in activity there ahead of U.S. election over the next few months?
Yeah. Okay. Morning, Mark. I think in terms of the revenue split, I think last year as we probably had a revenue split of around 45-55, first half to second half, and that was due to our supply chain disruptions. As I mentioned, this year, our lead times have been significantly improved. So for example, in the Bath example, it was 16 weeks first half of last year, it's 6 weeks first half of this year. So with last year, with the longer lead times, the orders were pushed into the first half of the year. So what we saw was a elevated or a temporary elevated order book, which we then delivered on in the second half of the year.
I would say the order book is still elevated, but really, that's due to a function of us having good orders and a good book to bill above one. So I would say supply chain disruptions are fully behind us now, and we are seeing normalized delivery. Ben, do you wanna add anything on that in terms of?
No, no, nothing. No, nothing on that.
Okay. I think in terms of the electrification, we actually have seen good momentum in North America, and we've actually continued to see strong momentum in our orders in North American upstream. So I would say, look, the risk is there, but we're not seeing it yet. Does that help?
Great.
Yep, that's helpful.
Thank you.
Thank you very much. If we could kindly ask to keep one question per person to give the management team a chance to go through all the questions. Our next question is from Thomas Elgar with Deutsche Bank. Thomas, your line is now open. Please go ahead.
Hi, guys. Well, just one for me anyway. Would you be able to develop a little bit further on what you're seeing in battery value chains within CPI? Obviously noting the weakness mentioned in China, have you seen your customers become more hesitant globally? Just trying to understand, you know, what if China is leading trends here or if we're still leg down in other areas. Thank you.
Okay, yeah, good question. I think with the battery value chain, as we highlighted, these are where we've concentrated on segments within the value chain of producing the batteries. So from the mining to the chemicals element to the actual manufacturing of the batteries themselves. As we said in CPI, we've seen a slowdown in terms of the nickel mining, your nickel autoclave mining projects. However, if you look at our chemicals business, if you look at our HVAC business, where in chemicals, we deal with the chemicals that goes inside the batteries or the manufacturing of the chemicals that goes inside the batteries.
And if you look at HVAC, where we're supplying products into the battery storage facilities, that slowdown hasn't happened as much, and we're still seeing, you know, double-digit growth in the HVAC and specialty chems area. So it's really in the mining area where we're seeing the slowdown. I guess in terms of demand, I think end user battery demand we're seeing is still okay. It's really the supply, and I think it's probably the oversupply of the nickel mining facilities. I think, Ben, coming from your previous history, you probably know more about that than say.
Well, I'll just probably reiterate Kiet's point. I mean, it's very much a nickel-related point, and I think, yeah, you probably read about the change in mix on some of the electric batteries that is driving that, in terms of moving from a sort of lithium, cobalt, nickel mix, and you're now going to something that's got iron and phosphate in. So again, you've probably seen some of the other larger refinery investments as well in Indonesia being pulled back as well. I think a large European major chemicals manufacturer, I think, announced last month they weren't gonna proceed with that. So it is very nickel-related.
Yeah.
... Great. Thank you.
Thank you.
Thank you very much. Our next question is from Bruno Gjonaj with BNP Paribas Exane. Bruno, please go ahead.
Morning, Bruno. Don't think we can quite hear you.
Morning. Sorry, guys. Could you provide any further color on the June and July order trends, which you are describing as encouraging? Was it a notable step up relative to the H1 run rate in absolute terms, or if compared to the prior, is there anything in the prior base that we need to be aware of? Essentially, it sounds like the momentum improved in June and July. I was keen to understand by how much and whether you think this improvement is sustained throughout the rest of the year.
You know, no, I think the sentiment is we're entering into the second half with good momentum. I think that's the main gist of what we're saying. The end markets outlooks are positive, and we wanted to give the view that we are seeing continued momentum going into the second half. Do you want to add anything to that, Ben?
I would say if you look at the run rates in June and July, versus the previous five months, it's probably a run rate that's double digit higher than the prior five months.
Okay, that's very, very helpful. On the e-frac side, is it possible to perhaps provide some color in terms of the magnitude of that order, and when it ships?
Yeah, I mean, the magnitude I can't specifically give, but it's over GBP 1 million. And it'll ship in the second half of this year.
And so just banging the upstream development in terms of the sales development in H1, because it looks slightly underwhelming relative to the rest of the oil and gas division's performance. Sales roughly flat in H1 on an organic basis. I know the prior year comp was tough, but on an absolute basis, it wasn't running at a high level. So how do you, I guess, explain the more underwhelming sales development in H1 for upstream, and I guess, given all the positive sentiment around that end market or what you're seeing, is that just delivery, phasing of deliveries in the order book on that side, or is there something else happening?
Okay, I couldn't quite hear you, but I think, I think what you were relating to was the revenues in H1 for Upstream. Is that right?
Yeah.
And the momentum into H2?
Mm-hmm. Yeah, that's right.
Okay. I think, I mean, we're
Yes, that's right. Just, because-
Go on.
I was just gonna... Just because it looks slightly underwhelming, flat year-over-year sales in Upstream, but we're describing a very positive market environment. I was wondering what drives that or what's driven that. Is that just phasing in the order book, or is there something else that's happening on the Upstream side?
Yeah, that's absolutely right. I mean, I think Rotork quite difficult to compare quarter-on-quarter. You know, and so it really is phasing of order books. Again, it goes back to longer lead times last year. Whereas, you know, lead times for North American upstream products out of our U.S. plant is now circa four weeks. And so it's probably it's more normalizing of order books and deliveries.
Got it. Thank you very much.
Thanks, Bruno.
Thank you. Our next question is from Maggie Schooley with Redburn Atlantic. Maggie, your line is now open. Please go ahead.
Yep. Good morning, all. Thank you for taking my questions. I had two, if I may. The first, you mentioned that the rollout of the ERP was going well. We have seen some hiccups in the sector on that, but can you just remind us of the time frame, when you expect that full route, full rollout to be completed and more just generally the phasing of that? And then secondly, just qualitatively, it, it's a short follow on from both Andy and Jonathan's questions. When you start to sell these larger e-frac orders, which go across multiple points, and given your route to market is, is varied, how are you selling this to other clients and customers? How are you displaying the benefits to this?
Are you bringing people in to see it, or how can we think about how you're really getting the message out of the total cost reduction and the benefits of these projects?
Yeah.
Given your route to market?
Yeah. Okay. Morning, Maggie. Thanks for the question. Do you want to... I'll do the electrification first, and then, I'll hand you over to Ben for the ERP. I mean, it really comes down to our approach of winning business, and it's a great question because it highlights how we win business within our target segments. I mean, we've been working with this, with our customer in the completion, in that completion stage. They have been looking to electrify their products. They've obviously come to us being the number one actuator supplier, and we've worked with them to develop their solution.
In doing that, we understand the value proposition that it will give to that customer in terms of ease of installation, cost of to produce the e-frac platform, as it were, total kind of cost over the life. So we understand the application, we understand the customer's problems that they're trying to solve, and then we can take that and create a value proposition out of that. And then our sales force, our business development teams will obviously work with other customers in that industry to really promote the virtues of electrification. That's on one side. On the other side, I think that a lot of the operators are looking to reduce their Scope 1, Scope 2 anyway, so it's already in their mind.
So as what we've found as one goes, the others will look across to see what's happening, and we're there really to promote in terms of how we solve problems and how we solve solutions for them. And that's how we really market, and that's how we expand and develop business across the Upstream and the Midstream for electrification. Hoping that answered that?
Yeah.
Yeah. Do you wanna do the ERP?
Yeah. Hi, Maggie. Just on the ERP, so just to remind everyone on the call, so at the end of last year, we'd spent GBP 45 million on business transformation. This year, we're forecasting another GBP 20 million, so it'll be GBP 65 million at the end of this year. And then in total, we estimate the total cost of the implementation is gonna be approximately around GBP 100 million. In terms of your question around the progress, I think I recognize your point around there's a few ERPs that have had a bit of bad press recently. I've never found one that gets good press, if I'm being honest with you, given the challenges around doing them.
But I think we need to be honest that, you know, I think some of this spend is no longer discretionary. I think a lot of businesses that have been operating on disparate ERP systems, given the challenges we've got around, you know, cyber and cybersecurity, I think moving to a single ERP is a lot safer, so I think I'd make that point. I think the second point you heard me speak about at the start when I spoke to Andy, I think, you know, how do we simplify our processes and systems to really, I think, enhance how we, you know, operate internally and deal with our customers? And I think if you don't have a single ERP, it's very difficult to do that, so I think that will facilitate that.
I think the second thing is, once we've got a controllable and scalable ERP system, it's very much around, you know, cost avoid going forward. So this is very much around, you know, you become people agnostic as you really automate your processes. So as you know, Kiet, myself, and the rest of the team want to grow the business, you know, mid to high single digits, you know, we can do that without putting a huge amount of cost into the business. And, finally, I'd just say just in terms of the rollout itself and the progress, we've gone live in Bath, which is our biggest site at the back end of last year. We had some lessons learned from that. We are now preparing to go live in some of our European entities.
The team, we've got a fantastic team that's working on it, working really hard to make sure it's a success. And we anticipate that we should be fully rolled out towards the end of 2026 or the start of 2027, around that timeframe.
Okay. Excellent. Thank you very much.
Okay.
Thanks, Maggie.
Thank you. Our next question is from Himal Bundia with UBS. Himal, your line is now open. Please go ahead.
Good morning, Kiet and Ben. Himal Bundia from UBS, and thank you for taking my questions. First, could you just provide a bit of color on what LNG order intake looked like in the quarter and what you're seeing across different regions in the space? And then, just a quick follow-up: How well is your supply chain operation set up in a scenario of potential trade tariffs? Thank you.
Sorry, could you just repeat the last question for us?
Sure. Apologies. Just wanted to understand how your supply chain operations are set up in a scenario of potential trade tariffs?
Okay, understood. I think the LNG, the LNG segment for us, we've traditionally, Rotork has always been very strong in LNG. At the moment, what's happening is we're tracking a number of projects. We're very late cycle, so we have sight of those projects coming through. Typically, what would happen, though, is our customers, the valve makers, will receive the orders, and then we will receive the orders further down the line. Whilst we've seen a level of LNG activity, we haven't really seen the orders come through in terms of the big uptick. And we've always said we anticipate that coming through or starting to come through in 2025, so that's really still the case.
But we're tracking all of these projects, and we know what's coming through the pipeline, so we're confident that the LNG will be good for us going forward. In terms of the tariffs, we predominantly run what we call a local for local, so it's really a region for region. So whatever we produce in a region, we predominantly buy those products for our supply chain in that region, with the exceptions of chipsets, which kind of originate from Taiwan and the Far East. So in terms of tariffs, we're pretty well set up. We've also got very good pricing power, and we've demonstrated over the kind of supply chain disruption years that we can put through successfully, you know, pricing to cover inflationary costs, be it materials, logistics costs, labor costs.
So we're confident that we can offset any tariff or import duties to carry on maintaining our margins. Do you wanna add anything? No, I think that's fine.
Clear.
Yeah.
Brilliant. Thank you.
Thank you.
Thank you very much. This marks the end of the Q&A session. I will now hand back over to Kiet for any closing remarks.
Yeah, once again, thank you everyone for dialing in, and thank you for your interest in Rotork. If I can summarize, we've had a very good start to the year. I'm very pleased with performance, you know, which culminated in double-digit increase in revenues, adjusted profit, and in EPS. We've got a strong financial position, which gives us, you know, good flexibility to carry on with investing in our organic growth, in shareholder returns, and in bolt-on acquisitions. The end market outlook for us is positive. We've got good visibility going into the second half, and our full year expectations are unchanged. So thank you very much for your time, everyone, and thanks for dialing in.