Rotork : Half Year Results Press Release 2022

Tuesday 2nd August 2022

Rotork plc

2022 Half Year Results

Encouraging momentum, outlook confirmed

Adjusted highlights	H1 2022	H1 20215	% change	OCC3 %
change
Order intake1	£340.1m	£298.2m	+14.0%	+12.1%
Revenue	£280.0m	£288.3m	-2.9%	-4.8%
Adjusted2 operating profit	£53.3m	£62.7m	-15.0%	-17.9%
Adjusted2 operating margin	19.0%	21.8%	-280bps	-300bps
Adjusted2 basic earnings per share	4.8p	5.5p	-12.7%	-15.9%
Cash conversion4	68%	94%	-	-
Statutory highlights	H1 2022	H1 20215	% change
Revenue	£280.0m	£288.3m	-2.9%
Operating profit	£44.0m	£50.6m	-12.9%
Operating margin	15.7%	17.5%	-180bps
Profit before tax	£44.6m	£50.7m	-12.0%
Basic earnings per share	3.9p	4.4p	-11.4%
Interim dividend	2.40p	2.35p	+2.1%

Summary

• Orders were up double-digityear-on-year, reflecting an encouraging performance from our Chemical, Process & Industrial and Oil & Gas divisions and price increases which were successfully implemented in January and May
• Our supply chain improvement initiatives are taking effect and deliveries picked up through the period. First half revenues were lower year-on-year as expected due to supply chain challenges in the first quarter
• Our Shanghai site resumed full operation in early June following the COVID-19 lockdown and made good progress delivering delayed shipments to customers
• Adjusted operating profit margin remained resilient at 19.0% despite lower volumes and the phasing of price benefit due to the record order book. Statutory operating margin was 15.7%
• Net cash of £90.4m (December 2021: £114.1m), lower in part due to strategic inventory build
• We reaffirmed our commitment to improving our ESG performance in our Sustainability Report and highlighted how our products and services can enable a sustainable future
• Our continuing work on strategy confirms we are well placed to deliver on our ambition of mid to high single-digit revenue growth and mid 20s adjusted operating profit margins over time

Kiet Huynh, Chief Executive, commenting on the results, said:

"We enter the second half with encouraging momentum, a record order book, and with our supply chain improvement actions taking effect. Whilst forecasting remains challenging due to geopolitical and macroeconomic uncertainties we continue to expect our full year results will have a greater than

usual weighting to the second half, which will be even more pronounced than our previous expectations if recent sterling weakness continues.

Since presenting my first set of results in March I have spent time, together with my senior team, determining how we will deliver on our growth ambition. Our progress to date confirms that we are well positioned to deliver profitable growth. To summarise our thinking on strategy, we will target the segments which offer the greatest opportunities for profitable growth, including those which form part of our eco-transition portfolio, whilst making ourselves as easy to do business with as we can be. We will expand on these themes at our Capital Markets Event in November."

1.Order intake represents the value of orders received during the period.

2.Adjusted4 figures exclude the amortisation of acquired intangible assets, restructuring costs and other adjustments (see note 4).

3.OCC4 is organic constant currency results excluding discontinued businesses and restated at 2021 exchange rates.

1. Adjusted figures, organic constant currency ('OCC') figures, cash conversion and ROCE are alternative performance measures and are used consistently throughout these results. They are defined in full and reconciled to the statutory measures in note 2.
2. As a result of IFRIC agenda guidance in April 2021 on Software as a Service (SaaS) and treatment under IAS38, 2021 has been restated to reflect the updated treatment. The detail on this restatement can be found in note 1.

Rotork plc	Tel: +44	(0)1225 733 200
Kiet Huynh, Chief Executive
Jonathan Davis, Finance Director
Andrew Carter, Investor Relations Director
FTI Consulting	Tel: + 44	(0)20 3727 1340
Nick Hasell / Susanne Yule

There will be a meeting for analysts and institutional investors at 8.30am BST today in the Library at the offices of JPMorgan Cazenove, 60 Victoria Embankment, London, EC4Y 0JP. The presentation will also be webcast, with access via https://www.investis-live.com/rotork/62cec73f299ad30e007a93d2/eabwq. Please join the meeting a few minutes before 8.30am to complete registration.

Summary

Purpose

Our purpose and sustainability vision are one and the same: keeping the world flowing for future generations. We play an integral role in enabling the transition to a low-carbon economy as well as helping preserve natural resources such as fresh water through our intelligent products and services.

Operating responsibly

The wellbeing of our people and partners is the number one priority of everyone at Rotork. We are proud of our 'safety first' culture and require our employees to complete safety training each year. We launched our Net Zero targets earlier this year and are working hard to achieve our emissions reduction targets.

Business performance

Group order intake in the period increased 14.0% year-on-year, and 12.1% on an OCC basis, to £340.1m. Orders were strongly ahead at both Chemical, Process & Industrial ("CPI") and Oil & Gas. Water & Power orders were modestly higher despite a tough prior year comparison.

During the period customers continued to spend on upgrade, refurbishment and maintenance as well as automation, electrification and environmental projects. Hydrocarbon prices rose to levels not experienced since 2012 reflecting recovering demand, earlier underinvestment and geopolitical events which have disrupted energy supplies. These events have necessitated a reconsideration of energy security risks globally and there are clear signs of a recovery in related project activity, particularly in the midstream sector. Higher energy prices have contributed to inflation increasing to levels not seen in decades. The resulting pressure on the consumer has caused economists to reduce their forecasts for global growth materially.

The majority of Rotork's activity continues to be driven by customers' operational rather than capital expenditure. We estimate that maintenance, repair and small to mid-sized automation/upgrade projects (individual orders less than £100k) generate 75% of Group orders by value in a typical year, and that orders above £1m represent only 5% of Group order intake.

Our operational teams performed well in what continued to be a challenging environment. As we reported on 29 April, our important Shanghai facility was closed in accordance with local COVID-19 lockdown rules in mid-April. The facility resumed full production in June and made good progress delivering delayed shipments to customers. We thank our team for their efforts during this difficult time.

The COVID-19 pandemic continues to pose significant challenges for global supply chains. During the period we continued to see shortages of semiconductors, electronics and other components, disrupted freight services and elevated costs. Labour rates were higher and we also experienced an increase in the cost of key commodities such as copper, aluminium and steel.

Our self-help initiatives - such as direct purchasing and forward buying of semiconductor chips, the re-certification and re-engineering of products, the securing of contracted logistics routes and tactical inventory build - have started to offset supply chain challenges. Our Global Strategic Sourcing and Global Distribution teams continue to focus on mitigating the impact of higher costs through working with our materials and logistics suppliers. Our Commercial teams remain in close contact with customers, so required price increases are understood and do not come as a surprise. We completed two price increases in the period, one on 1 January, and the other on 1 May, which will deliver greater benefit to revenue in the second half of the year. The delay in price increases impacting revenue due to the record order book also means we saw a price/mix headwind in the first half.

Group revenue was 2.9% lower year-on-year (OCC: -4.8%) at £280.0m with higher price realisation and favourable currency translation more than offset by reduced volumes. The lower deliveries reflected component availability and logistics challenges and the cessation of deliveries to Russia. CPI revenue was ahead double digits, with all three

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sectors up year-on-year. Oil & Gas sales were down mid-single digits. Water & Power revenues were down double- digits, particularly impacted by semiconductor shortages.

By geography, Asia Pacific revenues by destination were unchanged year-on-year. Europe, Middle East & Africa ("EMEA") sales were lower, the result of a significant reduction in activity at Oil & Gas. Americas revenues were ahead, with higher Oil & Gas activity more than offsetting a decline at Water & Power.

Rotork Site Services, our global service network and a key differentiator in our industry, made good progress in the period. Sales were broadly unchanged year-on-year despite disruption due to supply chain issues. Rotork Site Services is managed as a separate unit within Rotork's divisions and continues to contribute a significant proportion of Group sales (19% in the period).

Adjusted operating profit was 15.0% lower year-on-year (17.9% OCC) reflecting lower volumes and higher materials and labour costs which more than offset increased sales prices and Growth Acceleration Programme savings. Adjusted operating margins were 280 basis points lower at 19.0%.

Return on capital employed was 27.0% (H1 2021: 32.9%), driven by lower operating profit and higher capital

employed. Cash conversion was 68% (H1 2021: 94%) reflecting the lower working capital position at the start of this year, the investment in tactical inventory and the phasing of sales activity within the second quarter.

Our balance sheet remains strong, with a net cash position of £90.4m at the period end (December 31: £114.1m). This provides us with optionality in uncertain times and the financial flexibility to implement our organic investment plans, pay a progressive dividend and execute our targeted M&A strategy. We regularly review our capital needs and in the event in the future we determine we have surplus cash, we will look to return it to shareholders.

Dividend

We recognise the importance of a growing dividend to our shareholders and are committed to a progressive dividend policy subject to satisfying cash requirements, which can vary significantly from year to year. The Board is declaring an interim dividend of 2.4p per share which is equivalent to 2.0 times cover based on adjusted earnings per share. The interim dividend will be payable on 23 September 2022 to shareholders on the register on 19 August 2022.

Outlook

We enter the second half with good momentum, a record order book, and with our supply chain improvement actions taking effect. Whilst forecasting remains challenging due to geopolitical and macroeconomic uncertainties we continue to expect our full year results will have a greater than usual weighting to the second half, which will be even more pronounced than our previous expectations if recent sterling weakness continues.

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Strategy update

During my first six months as CEO of Rotork I have spent time together with my senior team and the Board reviewing the Group's current shape and formulating our future strategy. Thanks to our Growth Acceleration Programme ("GAP") Rotork's current portfolio is well positioned for the future. GAP has enhanced many aspects of the business: our culture; our commercial front end; our product and services portfolio, our infrastructure and processes; our operations and supply chain. We continue to deliver GAP initiatives including supply chain consolidation, improving and standardising core business processes and continuing our IT development.

Our ambition remains to deliver mid to high single-digit revenue growth through a combination of organic growth and acquisitions and mid 20s adjusted operating margins over time. In delivering our growth ambition, we benefit from the industrial megatrends of automation, electrification and digitalisation. We aim to play our part in helping our customers better their own environmental performance, while at the same time working to improve our own environmental and social performance as well as those of our end users and our suppliers.

We look forward to sharing more detail on our strategy later in the year. Importantly our work to date has confirmed that we are well placed to deliver on our growth ambition. Our strategy will incorporate growth focused initiatives such as the targeting of high potential sectors, including those in our Eco-transition portfolio, greater customer value and the launching of new innovative products and services.

1) Target segments

Key to our thinking is the identification of segments within each of our divisions where we have the right to play and that we believe offer significant opportunities for profitable growth. The most important megatrends are:

1. • Opportunities in developing markets. Industry analysts forecast that more than half of global flow control spend over the next five years will occur in Asia Pacific.
   • Automation, energy efficiency and electrification. AE&E are the three major megatrends of the industrial world and are forecast to accelerate.
   • Digitalisation and the industrial internet. Digitalisation is transforming industry and condition monitoring and remote diagnostics are being embraced by more and more of our customers.
   • Infrastructure modernisation. Global infrastructure investment and modernisation are forecast to grow significantly faster than GDP for decades.
   • Climate change aligned. It is imperative that our target segments are aligned with our 'enabling a sustainable future' principle. We see significant opportunities in climate change mitigation and adaptation.
2. Customer value

Due to GAP's Commercial and Operational Excellence initiatives we have made good progress in becoming easier to do business with. We can, however, go further and put customer value front and centre of everything we do. We are looking at areas that leverage many of GAP's commercial and operational initiatives, such as:

• Enhancing our go to market proposition. Strengthening our relationships with end users and key EPCs, leveraging our earlier salesforce alignment work.
• Global supply chain improvement. Developing a supply chain programme which will optimise our transportation network and provide an earlier warning of parts shortages.
• Customer experience improvement and reduced lead times. Further streamlining our internal processes allowing us to quote more quickly and be more responsive to customer needs.
• Leveraging our global service offering. Identifying opportunities to expand our service footprint and our

partner programme.

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