Okay, let's make a start. Good morning, everyone. Thank you for joining us today as we discuss our 2022 full year results. It's great to see so many of you here today. Alongside me is Jonathan Davis, and we also have Martin, Dorothy, and Andrew in the audience today. Rather than going straight into the commentary on our results, I wanted to take a few minutes to reflect on my first year as Rotork CEO. It was a busy and exciting year. I really enjoyed visiting Rotork sites as CEO, spending time with colleagues, customers, and end users post-COVID lockdowns, and meeting investors and analysts for the first time. Touring our sites around the world confirmed what a first-class engineering company Rotork is, with the Growth Acceleration Programme giving us a strong foundation from which to profitably grow.
Our people, who are talented, professional, and committed, really demonstrated their qualities, especially in the second half when we had to step up production to deliver our full year. At this point, I'd like to thank them all for their hard work during 2022. In meeting our customers again, their feedback was very consistent. Rotork has a fantastic brand, and our leading market position is not only the result of our quality products, it's also due to the high level of site service we provide. However, there's still room for improvement in our delivery lead times as we recover from the supply chain issues so many companies faced last year. I've also really enjoyed meeting our investors and analysts and getting a sense of what is on your minds.
It's clear to me that whilst our premium return on sales and capital and our strong cash flow and balance sheet are well understood, returning to growth is a key imperative moving forward, hence the launch of our Growth+ strategy. During the year, we experienced a reassessment of the fossil fuels industry's future and its role in the energy transition. The oil and gas industry is going to remain significant for decades to come and has an important role on the decarbonization journey. Following this reassessment, we are already seeing a pickup in activity more generally, but also specifically a focus on emissions reductions, which plays to our strength. During the summer, I spent time developing our Growth+ strategy with the Rotork senior team. This work strongly confirmed the important role Rotork is set to play in the energy transition.
As I've just mentioned, but also in decarbonization more broadly, including hydrogen, biofuels, carbon capture, and storage. Finally, a highlight of the year for me was the presentation of our Growth+ strategy at the Capital Markets Day in November. Having shared my reflections, I wanted to reiterate our purpose. We're a purpose-driven organization, and our work means far more than simply our products and services. Every day, we are helping tackle some of the most important sustainability issues of our time, hence our purpose, keeping the world flowing for future generations. Rotork's values are stronger together, always innovating, and trusted partner, and we're committed to collaborating and supporting one another to continuous improvement and being a responsible business. Before I hand over to Jonathan to discuss the results in more detail, here are my thoughts on the elements I'm particularly pleased with in the year.
We delivered a strong set of results in 2022, including, as expected, a much stronger performance in the second half. Orders were nearly 7% higher year-on-year on an OCC basis, with good momentum in the final quarter. CPI and oil and gas saw particularly strong order growth, while water and power orders were modestly ahead, reflecting a tough prior year comparison, as well as slower activity in China. We firmly believe our strategy of focusing on target segments, driving customer value, and on aftermarket activities is delivering results. Our operational teams performed well all year. As we discussed last time, the first half was particularly challenging. In the second half, our supply chain improvement activities, such as direct purchasing of chips and the recertification of products, enabled us to lift deliveries, and full year sales grew over 8% OCC.
With orders remaining ahead of sales in the year, we started 2023 with a record order book considerably ahead of last year. Operating margins recovered strongly in the second half, leaving full year margins broadly unchanged, a resilient performance given the inflationary pressures we saw last year. Return on capital employed rose year-over-year and was over 31%, demonstrating the value creation potential of the business. We finished the period with net cash of GBP 106 million, slightly down on a year ago. The reduction largely reflects our higher activity levels in the final quarter compared with the prior year. Moving to the non-financial highlights, we delivered a 17% reduction in our direct greenhouse gas emissions and will be including an absolute emissions reduction target in senior executive compensation starting 2023.
We're delighted to be featured in the highly regarded S&P Global Sustainability Yearbook, being within the top 5% in our global sector. After we hear from Jonathan, I'll provide an update on Growth+ before ending on our outlook. Over to you, Jonathan, for more details.
Thank you, Kieron Underwood , and good morning, everybody. We ended the year with a positive order trend and very strong revenue in the fourth quarter to achieve our forecast full year numbers. Order intake in the year was 6.8% higher than the prior year on an organic constant currency, or OCC, basis. Orders grew in all divisions and were ahead double digit in CPI. Revenue was GBP 642 million, 8.4% ahead of 2021, with the impact of the supply chain challenges reducing in the second half. Adjusted operating profit of GBP 143 million was 6.2% higher than the prior year, margins on an OCC basis were 40 basis points lower. Including currency, Adjusted operating margin was 22.3% compared with 22.5% last year, a 20 basis point reduction.
Adjusted earnings per share was 12.7 pence, a 7.1% increase. Currency was around a 4% tailwind, increasing revenue by GBP 25 million and adjusted operating profit by GBP 7 million. Cash conversion was 76%, reflecting the increase in working capital, largely the result of the strong Q4. Return on capital employed rose 120 basis points to 31.3%. The 6.7p full year dividend is 4.7% higher than the prior year and is 1.9 times covered on an Adjusted earnings basis. Revenue increased 12.8% with all regions and all divisions growing. Second half revenue was 28.8% higher than the comparative period, which was when the supply chain challenges started to impact revenue.
It's hard for us to isolate the impact of price increases accurately, but we estimate that when looking on an OCC basis, around two-thirds of the total revenue increase is the result of price, and the remaining third is volume growth. From a regional perspective, the Americas grew most with all three divisions improving on the prior year in the region. Asia Pacific growth was driven by CPI, with water and power flat, and oil and gas declined fractionally. In EMEA, CPI and water and power were the growth drivers, with oil and gas flat. Looking at the global performance of the divisions, CPI saw the strongest growth with revenue up 23.6%, continuing the momentum from the first half. Oil and gas revenue increased 8.9% and was 44% of group revenue, 2% lower than last year.
Within oil and gas, upstream and midstream grew in line with the total group revenue and both remained 11% of group sales. Downstream grew 6.4%, and as a result, declined as a percentage of group sales to 22%. Water and power grew 7.8%, with water once again driving the growth and power slightly lower. Rotork Site Services grew broadly in line with the group and represents 21% of group revenue. Given RSS has a much higher labor content, where price increases were lower, and is more concentrated in oil and gas and water and power, where growth rates were lower, maintaining sales at 21% of the group was a good performance. This adjusted operating profit bridge highlights the GBP 12 million increase in profit from the higher number of units sold.
The estimated impact of price increases has been excluded from this bar and is included in the next one. Net price mix reflects the estimated benefit from price increases over and above the impact of component cost increases, net of sourcing savings, as well as the usual mix of products and geographic. Price increases, you may recall, were set in 2022 predominantly to cover component cost inflation. The GBP 3 million net positive shows that despite the delay caused in realizing price benefits by the higher than normal order book, price increases are now flowing to revenue and generating a net gain here. This gain, together with the higher volume, has funded investments and cost increases. Direct costs decreased compared with the previous year, benefiting from our footprint optimization and labor efficiency savings. Investment in overheads grew GBP 10 million. A third of this is people costs.
Whilst average headcount fell by 2%, total people related costs rose 3%. Recruiting and retaining critical roles in the face of an active labor market to support the Growth+ strategy drove costs higher. The increase in travel costs as restrictions reduced accounts for around another third, with the remaining third spread across all other areas. These movements resulted in gross margins of 45.6%, 60 basis points lower, and adjusted operating margin 40 basis points lower on an OCC basis at 22.1%. We started the year with net cash of GBP 114 million, which reduced to GBP 106 million by this year end. The two largest outflows being GBP 55 million of dividend and a GBP 55 million working capital outflow.
Inventory and trade receivables were both far larger outflows than normal, with inventory increasing GBP 24 million and trade receivables by GBP 40 million on the balance sheet. We increased tactical component inventory in the period as a means of mitigating supply chain and logistics risks which might impact production. As the price of components increases, this also affected the value held. This year, we would anticipate some of this to unwind with the logistics times normalizing and the supply chain stabilizing. Even with the increased revenue, inventory rose from 12% - 14.4% of sales. Trade receivables are heavily influenced by the pattern of sales in the period. With an unusually quiet end to last year and a more normal November, December this year, receivables increased by GBP 40 million, but day sales outstanding only increased by 1 day to 58 days.
As a result of the working capital movements, cash conversion was 76%. This is probably a good time to briefly look back over the 5 years of the Growth Acceleration Programme. I won't go through all of these metrics, but we'll highlight a few. The Programme has driven 200 basis points of margin improvement and 640 basis points of return on capital employed improvement, despite revenue being almost flat between 2017 and 2022. Footprint optimization saw manufacturing footprint reduced by 47%, while lean and productivity improvements all benefited returns. Despite the sharp working capital reversal recently, working capital reduced fractionally as a function of revenue. Together with the cash impact of all the other initiatives, the GBP 33 million generated has broadly covered our investment in the new ERP system, which recently went live in the Bath factory.
Finally, GAP led to a fundamental change in our divisional structure and the focus on end markets rather than products. The Growth+ strategy, launched in November, now builds on these achievements. Turning to the items below operating profit in the P&L, which are largely the same as we've seen in recent years. Gains on property disposals come from the sale of locations vacated as part of the footprint optimization or sales optimization programs under GAP. IT transformation costs are the configuration costs of our new ERP system, which are no longer capitalized. Redundancy and other restructuring costs are lower this year, the final year of the original Growth Acceleration Programme. Finally, the cost of exiting our Russian sales and service entity is estimated at GBP 3.6 million, largely as a result of asset write-offs and redundancy.
As a reminder, Russia contributed around 3% of group revenue in 2021. Tax rates have moved slightly higher this year. The headline effective rate increased 70 basis points, and the adjusted effective rate 10 basis points to 23.9%. This is a combination of higher rates in a number of our markets, plus a shift in geographic mix of our profits. Turning to provide a little more detail on the divisions. We saw improving momentum within oil and gas markets through last year and ended the year strongly. With the improving supply chain conditions, this began to flow to revenue during the second half, and despite the loss of Russian business, revenue grew. Revenue was 8.9% higher than the prior year, and we estimate volumes were low single digits higher within this. Sales were higher across upstream, midstream, and downstream.
EMEA revenue was broadly flat, with growth in downstream offsetting a decline in both upstream and midstream. This includes the lost Russian business. Western Europe was particularly strong in both midstream and downstream, with the midstream including a number of pipeline electrification projects. In Asia Pacific, good growth in China and Australia upstream was insufficient to offset declines in India and China downstream, both of which have benefited from projects delivered in the comparative period. The Americas sales grew the strongest and were up in both North America and Latin America. North America upstream was active, driven by an increase in sales of electric actuators on wellheads to reduce methane emissions. Downstream was spread throughout the region in a mix of refinery and tank storage projects. Adjusted operating profit was 13.5% higher, and margins improved 90 basis points to 22.6%.
Margins were impacted by positive pricing and volume growth, which contained the impact of component cost increases. This was helped by product mix with revenue less weighted to products containing electronics, where cost increases have been the highest. Improved labor efficiency and other costs broadly flat meant revenue increase improved margins. CPI reported the strongest growth in both orders and revenue. Revenue grew in each segment of CPI and in each region, and was up 23.6% in total. Within this growth, we estimate the impact of pricing was high single digit. Asia Pacific revenue grew strongly with our target niches showing encouraging growth. Process industries, including mining, were particularly strong in China, as were sales of our Instruments products. EMEA growth was across all segments, led by process industries. The Americas also grew with the processing segment strongest.
Adjusted operating profit was 19.7% higher, margins declined 90 basis points to 25.8%. The benefits of operational gearing and efficiency improvements were more than offset by higher component costs and a higher share of overheads. One of the characteristics of the Water and Power division is that it has the highest proportion of electric actuator sales, and therefore saw the greatest impact from supply chain disruption. Revenue was lower in the first half, with a 40% sequential increase in H2, full year revenue grew 7.8%, but with little volume growth. Asia Pacific revenue saw power lower, whilst water was marginally higher. A large waste of energy power project in China delivered in 2021 was not repeated this year, leading to a reduction in revenue.
The Americas saw strong growth in water as the supply chain constraints eased, and power was lower as a large refurbishment project in 2021 did not repeat this year. In EMEA, the growth was in power with a similar power station refurbishment project shipped in the second half of the current year. Adjusted operating profit was 0.3% lower at GBP 40.3 million. With electronic component cost increases and availability disproportionately affecting Water and Power, it had the lowest revenue growth and highest component cost headwind. As a result, margins fell 200 basis points to 25.2%. Looking forward to the current year, pricing and inflation remain significant factors affecting the income statement. We raised prices twice in 2022, and there's some carry forward benefit from these increases into 2023.
We've also increased prices as normal on 1st of January this year. Over the last two years, price increases have been focused predominantly on offsetting component cost increases. For 2023, the focus has been on wages, energy, and other cost inflation. We should therefore expect to see price benefiting gross margin more than in the last two years. In addition to wage inflation, we also expect to see an increased investment in headcount this year to support Growth+. This will be spread across sales teams as they focus on target markets, operations in to support the customer value initiatives, engineering to support accelerated product development, and IT as we start rolling out the ERP system globally. This will contain margin expansion in the coming year. Sterling has weakened in recent weeks, but the tailwind is currently lower than that seen last year.
If current rates of around $1.20 for US dollar and EUR 1.12 for euro, were to apply for the rest of the year, this would be around a 1.5% tailwind. Finally, CapEx. Including a similar level of spend on IT development to last year, which is now expensed below adjusted operating profit, total spend is expected to be circa GBP 18 million. In summary, we ended the year with good order momentum and a record order book. The supply chain challenges seen from 2021 into 2022 have not disappeared entirely, but have largely stabilized. We remain vigilant and continue the mitigation strategies previously put in place. Inflationary cost pressures look likely to remain a feature this year, albeit it might be less about component costs and more about people and energy costs.
Our ability to pass this through pricing as well as to grow volumes should allow us to cover this and also fund areas of investment in the Growth+ strategy. I'll now hand back to Kieron.
Thank you, Jonathan. I'll now provide an update on the Growth+ before turning to the outlook. As a reminder, Growth+ builds on the foundations developed by GAP and has profitable growth front and center. How we achieve that will be delivered in multiple different ways. The Plus element covers key areas in addition to growth, items linked to delivering a sustainable future that benefit all our stakeholders. Growth+ is designed to deliver on our ambitions of mid to high single-digit revenue growth and mid-twenties adjusted operating margins over time. Within Growth+ are three pillars which we believe are key to driving our growth. These three pillars are target segments, customer value, and innovative products and services. Enabling a sustainable future underpins the three pillars and captures our determination to achieve sustainability across the business. The first Growth+ pillar is target segments.
We've identified key segments within each of our divisions where there are significant opportunities for profitable growth, where we have the right to play. Our second Growth+ pillar is customer value. We want to put the value we provide to our customers at the forefront of everything we do. Initiatives in this pillar include go-to-market enhancement, global supply chain program, and improved customer experience. The third pillar is innovation, the lifeblood of Rotork. Over the last several years, we've brought our teams together to streamline how they deliver innovation. Our teams are focused on projects which are aligned to our chosen target segments with automation, electrification, and digitalization, and with our enabling a sustainable future principle. To facilitate the delivery of Growth+, we'll continue to see investment, particularly in people, to support our target segments, customer value, and innovation pillars.
We've also recently refined our organizational structure and have appointed our first Chief Technology Officer, as well as created a business transformation function to deliver our change programs. We introduced our target segments at the Capital Markets Day in November. As a reminder, these are markets where we have the right to play, where we have a strong value proposition, and where there are exciting growth opportunities that we can leverage. We estimate market growth of our target segments at high single digits and that in total they represent around half of group sales. It's important to understand that this doesn't mean we'll stop selling into the other markets we serve where we anticipate there will still be market growth. However, the target segments are where we look to prioritize investments to grow faster than the base business.
To highlight a few examples following on from the Capital Markets Day, I'm pleased to report good early progress in methane emissions reduction, a target for the oil and gas division. Demand from choke valve manufacturers for the IQTF product, a variant of our leading electric actuator, grew strongly year-on-year as North American upstream operators sought to eliminate methane emissions from new and existing wellheads. In anticipation of demand, we're planning to increase capacity as well as reduce lead times through a program which I'll talk more about in the customer value pillar. Again, we're pleased to have made good early progress. One of CPI's target segments is carbon capture, usage, and storage. One example is Northern Lights, the world's first open source CO2 transport storage infrastructure, a major milestone towards decarbonizing Europe.
Rotork electric actuators have been selected for pipeline shutoff and tank storage emergency shutdown applications. The customer chose Rotork's robust, safe, and reliable actuators due to their prior experience with Rotork products in the oil and gas offshore environment. The actuators are due to be installed this year. A key target segment for water and power is wastewater treatment. During 2022, Rotork supplied electric and fluid power actuators to a number of wastewater treatment modernization plants around the world. The purpose of modernization is to improve water quality more efficiently and from a more automated plant. Examples of water projects include the PUB Water Reuse project in Singapore. PUB is Singapore's national water agency. A key differentiator in winning this project was Rotork Site Services. The solution incorporates a wide range of Rotork products and services and was worth around one and a half million pounds.
Turning to our customer value pillar. I'm pleased to report that we're making good progress with a number of initiatives. As a reminder, customer value is about putting the value we provide the customers at the forefront of everything we do. We firmly believe every Rotork colleague has their part to play in delivering this. A great example of customer value in action is our ACE pilot, where we seek to significantly reduce the lead times on certain high running products to provide great service as well as great product differentiation. Achieving Customer Excellence, or ACE, has been a real success, with 80% of product lead times at two European producing sites making gears reduced to two weeks from 16 weeks. With the pilot projects proving successful, we plan to roll out ACE to other targeted product lines over the next few years.
This includes the IQTF product, as I previously mentioned, where we aim to reduce the lead times to help grow our methane reduction initiative. We're also making good progress with our customer experience initiative. This is about optimizing business processes, allowing us to quote more quickly and further reduce our end-to-end quote-to-order lead times. Through our voice of the customer work, we know that short quote lead times is important to our customers, and together with ACE will result in higher business conversion. Using the lean tools that we've embedded and implemented within our operations, we'll now deploy these to the front end of the business to streamline the processes linked to improving lead times.
A key enabler of this is the integration of our ERP systems. We're pleased to say we've gone live with our first implementation at the Bath factory, which was successfully completed a few weeks ago. I'd like to thank everyone involved for their hard work in delivering this successful launch. Moving on to innovation. In 2022, we continued to innovate and develop new products and solutions aligned to our target segments and key drivers, including electrification, digitalization, and product efficiency. This was alongside our essential work in successfully re-engineering and recertifying product ranges that would have stopped production due to semiconductor availability. Within 2022, we launched another five new products, one of which is our enhanced IAM, Intelligent Asset Management. Enhancements here include upgrades to the data upload and analytics systems, both incorporated in response to customer requests.
These help our customers decide where to prioritize their maintenance to maximize the uptime on their site and eliminate inefficiencies. As well as being a profitable growth area in its own right, IAM can also be leveraged by the wider Rotork Site Services team for lead generation for service and maintenance. In addition to product and service innovation, as described at our Capital Markets Day, we continuously weigh up whether bolt-on acquisitions could aid in our innovation and accelerate the commercialization of target segments. You'll recall our Eco-Transition portfolio consists of products and services which deliver clear sustainability benefits. The portfolio represents a significant proportion of our sales, with many of our target segments aiding to increase the proportion of this over time.
The three subsegments of the portfolio are shown on this slide and represent close to 30% of our sales in 2022. Their sales overall grew 10% year-on-year, with water and wastewater and methane emissions reduction growing faster than that and faster than Rotork overall. The new energies and technologies portfolio, the smallest of the three, has great momentum. Sales fell year-on-year, as in 2021 there was a large waste-to-energy project in China that did not repeat. Turning now to the market outlook, starting with oil and gas. During 2022, we started to see the return of industry investment in production following several years with spend more focus on upgrade, refurbishment, and maintenance projects.
Looking forward, whilst there's uncertainty, we believe the investment trend will continue, supported by the reopening of China and its impact on global oil and gas demand, as well as the reconsideration of energy security risks in Europe and elsewhere. We also continue to see good opportunities for environment-related activities, such as projects to tackle methane emissions. CPI is clearly seeing the benefits of its focus on target and niche segments, providing intelligent flow control solutions. The industry's drive towards lower carbon emissions, we've seen good momentum in decarbonization projects, as we've highlighted earlier with the Northern Lights project. The division is in particular seeing business wins in target segments such as chemical, HVAC, and mining. Water and power is benefiting from increased global water infrastructure investment, which is expected to continue. It is seeing investment in several areas, from building new water networks to improving existing ones.
Customers are increasingly focusing on efficiency and water quality with digitalization an important trend. Water and power can help in all areas. The lifting of China's COVID-19 restrictions has the potential to boost activity in this important region as well. In power, we continue to see refurbishment opportunities as well as good activities in smaller but high potential markets such as geothermal power. Turning to the summary and outlook. 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 commercial, product, and service offering with a great opportunity to create value for all stakeholders. We are committed to sustainability and will play a significant role in the flow control intensive new energies and technologies that will deliver a decarbonized economy as well as greater energy security.
We remain committed to our financial ambition of mid to high single-digit revenue growth and mid-twenties adjusted operating margins over time. In 2022, we delivered a strong set of results, including, as expected, a strong H2 performance and a resumption of organic sales growth. Order intake was encouraging, driven by the oil and gas sector and by CPI, including in the final quarter. I'll finish with the outlook we published this morning. The outlook for our end markets is positive. We entered the year with a record opening order book. The new Growth+ strategy has momentum. We are already seeing early benefits from our focus on our strategic pillars. Whilst mindful of the uncertain economic outlook, we expect a year of further progress in 2023. Thank you again for your interest in Rotork. At this point, I'll open the floor to any questions.
Harry.
Good morning, it's Harry Phillips of Peel Hunt. A couple of questions, please. Just in terms of the order book and the comments around lead times, what have you, are your order book lead times stretching out, or is your order book getting larger but with a shorter lead time and therefore more immediate deliverability? The second question is, I suppose trying to be an analyst, is you got the 50% sales into the target segments. How much of that 30% of eco transition is in that 50% target segment, please?
Okay, good questions. I'll start. The order book, whilst growing, don't forget there's elements of pricing in there as well. We haven't really seen too much of a shift in the period or the longevity of the order book, have we, Jonathan? No. It pretty much remains where it is. Don't forget we've got products that we that turn within a month, and then there's longer-term projects that turn within 4-5 months, and our order book is made of a composition of that balance really. Anything else you wanna add on that? No. I think that's about right. Good.
In terms of our 50% and our 30%, to be fair, all of the 30% is in the 50%, because if you think about our target segments, our target segments are all revolved around that.
Good morning. Hi. Good morning. Hi, it's Jonathan from Barclays. Just 2 questions, please. Firstly, can you just be a little bit more prescriptive on the benefit from pricing in 2023 versus 2022? Obviously, there's a consensus growth number out there. Are we still thinking that 2/3 of that potential consensus growth number could be price in 2023, or is it gonna sort of flip to maybe be 1/3 price, 2/3 volume? Just your initial thoughts there, please.
Fair point directionally, I think you're correct.
Okay.
It will be less about price, more about volume in 2023. Price is still low to mid-single digit % impact on 2023 revenues.
Okay.
That's including the benefit of the first of January 2023 increase, to be clear, which will gradually feed in as we get near the half year and beyond.
In terms of price rises for 2023, are there sort of set day or set months when you're going to do it? Obviously you did do it in 2022, obviously.
1st of January is the normal. That's what we've done at this point. Clearly we'll, like the last two years, keep it under review as we go through the year to see how other cost factors are moving.
Okay. Just the second question was just on power. If you strip out obviously the one-off order, which obviously impacted 2022 year-on-year, was the underlying demand in power actually growing for you guys?
The power was one of the segments, if not the only one, that saw a difficult Q3. And that was because of the lockdown issues in China. We saw a lot of the China power projects move out. We see that actually with the lifting of COVID in China, that's a positive effect, and we should see momentum coming through.
Okay. In terms of the refurb stuff, is there stuff in the order book in terms of power refurb orders that you have at the moment that potentially could come in 2023? Is that still stuff you're trying to get, essentially?
Yeah. I think we largely shipped, as Jonathan said in his section, the refurbish projects in Q4 of last year.
Okay.
We do anticipate, some coming in terms, of refurbs this year in 2023.
Which will be delivered in 2024?
It depends on where, when the customer would want it. If you can tell us when the order lands, we'll tell you when the deliveries are.
Right.
Thank you. Good morning, guys. It's Andrew Douglas from Jefferies. Three questions, please. Nice and quick. In terms of the investment in Growth+, I appreciate your comments that it might restrict margin growth a little bit. Is that the last year, or is 2023 gonna be the last year where investment in Growth+ will restrict margin growth, or do we have a few more years to come? You've got a strong balance sheet. Can you just talk about the M&A pipeline? Then thirdly, I recognize that you had a hell of a second half this year, in 2022, and there is a real risk of kind of normalizing. In your pre-prepared remarks, you were more cautious, it would appear, about oil and gas in the second half.
I would've thought more about CPI. Can you just confirm where the kind of the areas of potential normalization in maybe order intake in the second half might come? Thank you.
Okay. Yeah. Yeah. In terms of investment in Growth+, as we said, we will continue to invest in Growth+. It's, for me, Growth+ is our strategy over a number of years, and so that strategy will need investment at certain points over the number of years. It isn't a one-time investment. However, if you look at our ambitions to achieve mid-twenties operating margins you know we still expect to see year-on-year progression of our margins towards that ambition. However, we will balance that with the right level investments that we need to profitably grow in the future. In terms of the balance sheet and M&A, I mean, we're always looking at M&A opportunities. Where we're focusing our pipeline of opportunities is really revolved around our target segments. We have our Growth+ strategy now.
We understand where we want to play. Our pipeline is revolved around there. I think you know multiples have come down, but not come down significantly, so we're always reassessing. We're looking at opportunities where we can add innovation to our portfolio to help us accelerate within a target segment or a company that already has market share in a target segment that we want to play in or actually have market share in attractive adjacent markets. Those are all of the things that we think about in terms of our M&A. We won't overpay, and we stay committed to our you know discipline of that over the next few years.
Mm.
The last one in terms of orders, do you wanna take?
Like I say, can you try that one again?
In your pre-prepared remarks-
Yeah.
You talk about macro uncertainty.
Yeah.
Which is relevant, especially in the oil and gas sector in terms of what you said, say about uncertainty and CPI, uncertainty impact. I personally would've thought that CPI being a bit more cyclical is where a macro uncertainty would impact.
Let me answer that.
Absolutely. Kind of coincide with what you say.
Yeah.
Mm.
across divisions. I just want to understand, did I talk about it or am I missing it?
The uncertainty is the general macroeconomics, not specifically related to oil and gas. The uncertainty is China coming out of lockdown. We don't know how that plays you know. Fears of recession. There could be a softer landing, for example. That is general uncertainty. In terms of the outlook for our end markets, they're actually positive. We see positive outlook for oil and gas, especially in our target segments. Methane reduction is particularly strong with the IRA in America. That drives us, and that's only positive for us. We see the end use and the end users and the oil majors also investing in hydrogen carbon capture, that is positive for us as well.
CPI, I would say you know I get asked every time we're here, CPI expected to decline, it keeps on growing. I think the way to think about CPI is that we are playing such a broad market, what we've done is chosen very specific niche markets, those niche markets have got good macros, good macros to grow. We think that they're gonna grow over time, where we have the right to play. Segments such as HVAC, mining, chemicals have been very strong for us, we still see them continuing. CPI is about a niche play in a broad market. I wouldn't correlate it to a industrial trend, for example. Water continues to grow.
The one downside is the power market last year, but again, through the lifting of COVID, I would expect to see that change going into this year.
Okay.
Thank you. It's Max from Morgan Stanley. Could I just ask about how your supply chain and how would you sort of characterize how that looks versus 3 months ago? Are you carrying kind of extra costs this year from where you've had to go out and buy, say, chips from third parties rather than your core suppliers? Any way we can sort of quantify how that may impact margins as that rolls off.
Let me talk about it in broad. I'll go to Jonathan.
Sure
specific detail. I mean, one of the key elements of helping us deliver last year on our H2 was our supply chain improvement activities. Without those you know we wouldn't have delivered. Forward buying chips where we can, we will continue to do that. Although supply chain disruptions has reduced, we're still not out of the woods. We're still seeing issues on certain specific chips, capacitors, for example. We're just better at dealing with it, and the frequency of those have reduced. Where we need to, we will still forward buy to secure our supply. I think also with the logistics issues last year, we've had a lot of products on the water, for example. You know those should shorten.
We will expect to see a reduction in some of our inventory, but it won't unwind to previous level, just given the fact that we are still not out of the woods with the supply chain disruptions. Do you wanna comment on that?
Yeah. There's just more price in the components that are in that inventory. I think in terms of the chips specifically and the cost headwind for that, we obviously saw quite some impact in 2022 compared with 2021 from precisely that area. Our expectation in terms of moving into 2023 is that it's stabilized. It's not getting any worse.
I forget which results it was we were talking about chip costs going from $1.50 a chip to $60, $70, $80. We're still at those levels, but they're not getting worse. That really is the biggest element of that part.
Okay. Maybe just stay, just to follow up on the carbon capture project that you won. I mean, could you just help us sort of size how much that was for you in terms of kinda content, or value? Then when you look at the pipeline of carbon capture, is there kind of 1, 2, 3 more of those on the horizon? Just understanding kinda maybe how big that business can get and how quickly.
Off the top of my head, I can't quickly size it because the Northern Lights project is a number of different companies, delivering the project. Unfortunately, I can't size that off the top of my head. We do have a number of projects in the pipeline. It's carbon capture and hydrogen, 'cause often they come in. You know we're working on a number of projects. A couple are in the UK actually. I don't know whether you've heard of HyNet, in the North. There's a big Drax plant that are converting their plant into carbon capture. We actually have sight of all of the projects, and part of our targeted segments action is to go and get specified on those projects.
That's part of our action is to try and grow in those businesses. I think we'll go to you next, Rory.
Take it if you like.
Sorry, Rory. Mark Davies Jones from Stifel. A couple if I may. Can you give us a bit more regional outlook on oil and gas? Would you expect the U.S. to remain the strongest growth market this year? I guess part of that question is when should these incremental LNG investments and related post-Russia investments in Europe start to come through to real revenue?
Yeah, I actually would expect growth in all of the regions. You're right, the US has the potential for the fastest simply because of our target segment of methane reduction. You saw in the Eco-Transition portfolio that the methane part grew faster than the group overall. That will drive growth within the US. Also, another target segment for us is LNG. You won't typically see orders this year or in 2023, there's a lot of activity and a lot of the activity is in North America liquefaction build. We're expecting that to come through in the medium, long term. America is a key growth area for us. Saying that, I think we would expect also China to come back on stream with the COVID lockdowns easing.
Downstream refining we expect to come back on stream. Then actually in Europe, we've seen quite good momentum actually with smaller LNG projects and smaller infrastructure projects.
The pipeline electrification stuff.
Yeah.
which is also about or connected with.
Yeah.
-energy security in Europe.
Yeah. Okay. Thank you. Could you just add a few more words on the organizational changes you're making, particularly CTO? Is that sort of pulling more group level basic R&D together in one place rather than at the divisional level?
Yeah. For me, being an engineer and having covered that position, I think that is a hugely important position. It reports directly into me and actually that position you know there's a lot of pressure to deliver on the innovation that we need to deliver our growth. What I've done is we've streamlined our organization, we've put all of engineering under one roof, but we've also put product management under that as well. It's not just an engineering group, we want that CTO to be able to define the technology roadmap going forward, align to our target segments, and really drive the technology portfolio and the technology thinking to the business rather than an engineering one specifically.
Makes sense. Thank you. Hi, it's Rory Smith. Excuse me. It's Rory Smith at UBS. I think I've still got three unanswered questions. The first one's on methane reduction. You highlight a good early progress there. That's good, great to see. Would you be willing to put a revenue number on that or at least some color around your penetration of that market opportunity to date and how you see that developing in the next year or two?
I think in the Capital Markets Day we sized the potential of the market. I think we wouldn't wanna put an exact number on that just because of the fluidity of, of things going through. You know when we were talking about the Inflation Act last year, not many people knew about it. We knew about it was coming and that's why we chose that target segment but it's come quite quickly and well. I wouldn't wanna put an absolute target on it, but in the Capital Markets Day we framed and sized the market potential which is good.
Sure. Absolutely. Thanks. My second question relates to oil and gas margins more broadly. Obviously methane reduction, electric actuation going well but you highlighted volumes growing in the kind of more or the less electrical content, less electric actuation areas of oil and gas but then you're saying LNG China haven't quite come back in terms of the order intake yet. I was hoping you could just add some color on which areas within oil and gas have actually been going well and helping those margins through last year?
We talked about upstream and midstream being the strongest areas within oil and gas. Historically, those would've been markets that were more pneumatic and hydraulic actuators. Clearly what we're seeing now is that move to electrification in both upstream and midstream is driving a different product mix into those end markets. Where historically growth in those two might have been a margin headwind, that's diminishing. They still contain the largest proportion of our pneumatic and hydraulic actuator sales. That's the sort of the dynamic that still exists within oil and gas, and that was the reference to cost pressure being slightly less there because of less electronics.
Great. Thank you. My final question, just on CPI, you mentioned HVAC. It's my understanding that pertains at least somewhat to semiconductor markets. If you could just comment on what you're seeing there, please.
Yeah. The HVAC is in critical applications, so it's not specifically just semicon. It's in tunnel ventilation, semiconductor plants, data center plants. Areas where there's very high criticality in controlling the airflow is where we really are able to grow. The semicon in the past and also the data center elements have allowed that division to grow quite well. It's in other areas, tunnel ventilation as well.
Mm-hmm. Sure. Thank you.
Hi, it's Bruno from BNP Paribas Exane. I have a question just on the order outlook for next year. It feels to me that some of your end markets have been slower to recover. Your own order volumes, I estimate, are still below pre-COVID levels. With investment in some of these end markets now accelerating, should we be expecting organic order growth for next year to be closer towards those midterm targets that you've set in respect to organic revenue growth? Is there some reason why perhaps it should be slower? Finally, if you could perhaps comment on what you've actually seen to date in 2023. I appreciate it's early, how have you seen orders developing in the first few weeks of the year? Did you wanna do the price?
I mean, as Jonathan said, the orders in this year will have an element of pricing coming through. We expect to see the growth this year have more weight towards volume than pricing rather than last year, the difference.
That's more the case in orders than it is in revenue because of the delay in things going through order book to become revenue.
Mm-hmm.
That's, yeah, a heavier weighting towards volume in terms of orders this year.
Yeah. In terms of orders, I mean, it's very early days, at the minute, we remain positive. I mean, as I said, the outlook for our end markets is positive. We have our Growth+ strategy around our target segments. We are optimistic, notwithstanding the short-term macroeconomic effects, it's still early days to comment too much.
Right. And just to follow up on revenue, the shape of it and how we should be thinking about 2023? H1 of this year disrupted by supply chains. H2, a notable pickup. Is that H2 revenue number, would you consider it exceptional, or would you consider it a base to therefore annualize and build upon or at least maintain?
Yeah. I'll answer in the broad, and then you can do in. If you look at Rotork over the past 10 years, we've always had a higher H two and a higher H one.
Mm-hmm.
We've always been H two-weighted, and that was no different last year. The difference was last year it was a higher proportion in H two just because of all of the catch-up in H one. I would expect. Jonathan can probably tell you.
I was gonna say, I think in terms of weighting, we, yeah, we are hoping for a much more normal weighting because the business was running fast in the second half.
Mm-hmm
...and there was certainly an element of making good on a, on a softer first half. I think you know we've seen a wide range of weightings. I would imagine 2023 is gonna be more in the 47%-49% H1 rather than the 44% we saw last year.
Okay. Got it. Thank you very much.
Okay.
Oh.
Thank you. Dominic Coleman from UBS. Sorry, if I may, but hopefully quite quick. Firstly, could you just help me with the bridge for margin in 2023, just to make sure I don't get wildly carried away, 'cause there should be a decent volume and pricing tailwind, but you've talked about specific investments in the Growth+ . Should we think of that as being maybe a GBP 2 million-3 million or a perhaps GBP 4 million-5 million impact in 2023 over 2022?
The GBP 3 million-GBP 4 million being the...
Discretely extra investment in Growth+ that just hampers the margin progression.
I think the best way to say this is we are looking for margin progression. We are also looking to invest. We're expecting margin progression to be of a similar nature from the ones we've seen in more normal years where revenue has grown. I think it's hard to pin down the exact millions of pounds without getting very specific.
Okay. I'll make it up. Just in terms of the just in case versus just in time debate, and I think you said you're expecting inventory to remain elevated for the foreseeable, but how quickly might we see that working cap intensity come out of the business over the next year and perhaps 2 years?
I think bearing in mind that a chunk of the increase is around price rather than just the physical number of widgets on a shelf, there's a piece that doesn't unwind. I think when we also look at the activities in the ACE program that Gig outlined and some of the other activity on healthy inventory that goes alongside that, we will see inventory reduced to you know. I forget, in terms of % of revenue, we've seen very different numbers over the last 5 years. It's not gonna come back down to the levels it was at the lowest, possibly, in the short term. I think ultimately we will get back on that road of improving inventory efficiency within the business.
Great. Finally, just maybe a bit of color about what you might be doing differently to mitigate what appears to be an increased threat from cyberattack in the sector and more broadly, in the little while. If you could just give us a bit of color on that.
Yeah. I mean, that's a risk that is absolutely front and center in our minds. In November last year, we recently achieved our IASME accreditation. That goes a long way in terms of protecting our systems. That's an accredited body. We've had to do a lot to protect our systems. We also do training programs within our company. We have you know every month, modules coming out where employees are taking training in terms of IT, and you have to do a test and a score. We do simulated phishing attacks within the company, and we see how many hits that those phishing attacks take. It's absolutely front and center of what we're trying to do in terms of protecting ourselves from a cybersecurity point of view.
Mark Fielding from RBC. Thanks for the general comments you made on pricing into 2023. I suppose I'm just a bit curious. In 2022, pricing was obviously much stronger in CPI than it was in the other two divisions and you know it was high single-digit. The other two divisions looked to be low single-digit. Could you just talk a little bit more about the dynamics behind that and whether that continues into 2023 or whether that shifts around?
I think there's a couple of elements to it. First of all, it's down to product mix, 'cause price increases are not universal across all product lines, so there's a slightly higher weighting of those increases potentially into CPI than in the other divisions. The other aspect that's relevant in terms of the revenue side of things is CPI typically runs on a shorter order book than the other two divisions. It doesn't have the mega projects that are delivered in 12 months' time. Therefore, price increases feed to revenue quicker in CPI than they will do in the other two divisions.
In turn, does that mean there's a little bit of catch-up relatively in the other divisions then?
Yeah.
Yeah.
There's less carry forward benefit in CPI than there would be in oil and gas and water and power, for sure.
Thank you.
Hi. Good morning. It's Andrew Wilson from J.P. Morgan. I've got 2, I guess both on target market. I'm interested in terms of competitive dynamics within those target markets. Appreciating that it might vary across, but just to get a sense, is it typically the traditional competitors, the sort of the names we'd have talked about for years, or are you seeing a different set of competitors as you move into some of these different markets? Maybe I'll start there.
Yeah. It's actually very varied, so it depends on the end market itself. In oil and gas, you would talk about more of the traditional, more of the traditional competitors. In methane, that's slightly different because we're entering a market and it's more substitution in methane. We're going against more pneumatic players that we wouldn't have gone up against because that's not an area where we would play. For LNG, for example, the normal players. For water and power, absolutely the same, the normal players. In CPI is where you see the differences. We're targeting different niche markets, in those niche markets will be specialists who play in that market, and so therefore, we see a wider spread of competition within those segments.
I guess maybe squeeze in a kind of follow-up to that. Is there any great difference in terms of the profitability as a result of those different competitive dynamics? I mean, I appreciate, again, it's gonna be case by case, but if we're talking kind of the block of Rotork 22%-23% margins-
Yeah
... trying to get 25, 26, obviously it's not gonna be helpful if you've got drags in there.
Yeah.
I'm assuming not. Hopefully not.
Yeah, I mean, the way we chose our target segments is, A, we have the right to play, and B you know we've got a value proposition, but C, they've got good profit pools. We wouldn't have chosen target segments where, for example, we could grow but there's low margins because that wouldn't be attractive for us. We specifically chose the target markets where we could have good margins, where we have a high value proposition. Actually, as you think about the trend of electrification and the mix in CPI that Jonathan just said, actually, what we're driving towards more in our target segment is towards the UK transition portfolio, more towards electrification and instrumentation, and that lends to higher margins.
Yeah.
It's more of a positive mix going forward for our target segments.
sorry, at the risk of turning this into a conversation. In terms of there's no lag to that better profitability coming through. I guess I'm sort of talking about from a scale perspective. It's you know it's those markets can be profitable quickly. Is that the right way to think about it as well? I promise I'll stop asking about this.
Yeah. What I would say is the profits are already there. You know it's winning the business.
Right.
There's no question of going in at a low price, low margin to take share.
Not even to grow.
if that was your question, I can provide.
Yeah, no. It was, yeah, it was almost the trajectory on that. I do have a genuine second one, which is actually just around the CapEx. I was quite surprised actually on the slide, and apologies if everybody else knew this, but the degree to which the footprint is being reduced is obviously very significant.
Mm.
When you talk about the investment, how much of that investment is around products and how much of it is almost requirement for new capacity, albeit capacity which is different to what you had previously?
It's definitely not about adding capacity. Obviously, the footprint % reduction is about number of locations now. A lot of the ones that were reduced are probably smaller locations, and we've concentrated in the remaining large ones. None of the investment is really about adding capacity in those locations. You know the outsource manufacturing model lends itself to huge flexibility in terms of use of that footprint 'cause it's really about number of hours you're gonna run shifts to build product. The capacity is always about supply chain and having the components available.
Thank you.
Sorry, just a quick follow-up question. Mark Fielding, RBC again. Slightly related to that question and equally Dom's profit bridge. In terms of the bridge you gave us for last year, obviously you said a third of that GBP 10 million was around employee costs. How do we think about that balance this year in terms of number of employees which were down and labor costs that were up? Is the labor inflation similar this year to last year? Are the number of employees more stable now? I mean, I assume we're not in an environment where your employees are going to keep going down every year.
I think wage inflation is certainly higher in 2023 than it was in 2022. We've also brought the annual pay award forward 3 months as part of our kind of work on cost of living and how that affects people. Wage inflation is definitely a bigger factor in 2023's P&L than it would've been in 2022. I think there is also, yes, a desire to add people into those key functions to support the growth going forward. That's part of the reason kind of highlighting the areas in which we expect to add those individuals into the business to drive that growth.
Thank you.
Okay.
Okay. Any other questions?
No.
No.
Very good.
With that, thank you very much for your time.
Thanks.