Bodycote plc (BOY) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Bodycote 2020 Full Year Results Presentation. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Stephen Harris, Group Chief Executive, to begin. Stephen, please go ahead when you're ready.

Good morning, ladies and gentlemen, and welcome to our full year 2020 results. I'm here with Dominique Yates, at least virtually, who's going to help us -- take us through the highlights here and the progress that we've made in the year. If we look at what we're going to be covering, the agenda is on the slide now, Slide 3. We'll go through all these areas. The intention that we've got there is to give you some key takeaways, and we'll point them out as we go through, and we're going to try and expand on those as we make our way through the presentation. So first takeaway I'd like to bring up is our commitment to sustainability. The -- this is something that I'm being very passionate about for a long time, as those of you who know me realize both within Bodycote and also within my activities outside of Bodycote. I think what's changed in the last few years is that people actually now want to hear about it, which is a very good thing. Where we start in Bodycote is with our core values, and I encourage you to look at the very first page of our annual report. They're very simple, and you'll see them there. So if we then just talk a little bit about this slide on Slide 4. What I'd like to focus on is the path to net-zero carbon. And when you look at Bodycote, you should really look at this in a slightly different light from other people and other companies. And let me put that in context. We're a service provider. Our main inputs are people and energy, and what we do is we use energy to transform materials in terms of their properties. If we look at that in a slightly different way, what you can say is that what we actually do is manage energy, and we're really good at it actually. So if we actually get business from industrial companies, what we're doing is taking their carbon footprint and putting it onto our carbon footprint, and then we manage it down because we're much more efficient typically than any of the customers that we have. And that's a matter of the fact because of the type of processes we operate, and in fact, the carbon footprint, which is much lower, particularly with our Specialist Technologies. So when you look at us, you should also look at us not only as reducing our own carbon footprint, but we actually are an enabler of manufacturing industry's drive for carbon reduction. Now we do this because it's good for business. It's not necessarily for other reasons. But the fact that it is drawing everybody together to what's got to be noblest cause out there and it helps me sleep at night, I think it's no bad thing. So moving then on to the next slide. This is -- the strapline on top of this slide is really what we're talking about here today in terms of -- we'll bring it out further in the presentations. That's business transformed, resilience proven and structured for growth. If you look at our financial results, which is the first 4 bullets on Slide 5, you could see our revenue decline, 20%. I'd like you to focus on the EBITDA margin at 26.4%. Dominique is going to take you through these and point out why that actually is a very relevant statistic to look at. Moving down the page. Strategic progress, you'll see as we go through that our strategic progress and our restructuring program is actually part of our longer-term strategy. It's no accident that we managed to move quite fast than this because we already knew the direction that we needed to go. And really, what we were doing was putting in place things that we thought about quite a lot in the past. The restructuring program, GBP 36 million of cash costs, GBP 30 million of savings, and Dominique will go through with you the timing of all that. And our strategy is basically to align the business, and this has been the case now for some years, with the secular mega trends that are out there in road transport, electrification, point-to-point air travel and the reducing use of fossil fuels. And I'll expand on that a bit later. We've continued to invest. And the last item on this slide, the Board is recommending a final dividend of 13.4p. That brings the total to the year of 19.4p. That represents an uninterrupted more-than-30-year track record of growing or maintaining our dividend. So let's just look at the resilience proven item here. What I'm showing you on Slide 6 are 2 charts. One is the margin development, and the other is head count development. If you look at the gray bars on the left, they show you the downturn that happened in the global financial crisis for us from 2009 and then the regrowth in 2010 and 2011. On the right-hand side of each of the charts, in orange, is what's happening now. And a couple of takeaways from this slide. The first is, if you look at the margin that we've achieved in 2020 and compare it with 2009, it's clearly much higher. But the other thing to note is that 13% rounded is about the peak margin that was achieved in equal terms here, so at constant currency terms, in the decade prior to 2009. So quite a difference in quality of business there. The second takeaway to note is that the trajectory coming out of a recession for this business is quite high, and that's not changed. We have quite high operating leverage on the upside, and we should expect that in due course as revenues recover. Now just to note, how comparable are these margins, what was the revenue comparison between the 2. And indeed, you see that 2020, at the trough point, was 33% down compared with 2009, which was 31% down. The big difference is that 2020 happened in a period of weeks, whereas 2009 happened over half a year or more. The full-time equivalents, the head count numbers, the reason I've illustrated that is that you can see how more efficient this business has got. Just to put it in perspective, the constant currency revenues that we had in 2008 were only 5% higher than they are in 2020. And look at the change in people. The last point here in terms of slides in the key takeaways, this is really a summation of what we'd like you to look at. 2020 has live-tested the flexibility of our business. There's no doubt about that. Going forward, and we'll see this in more detail, we're actually in a mode now where we can stop talking about, "This business has changed. It's more resilient." I hope we've proven that. And the conversation can now move to the exciting prospects that we've got going forward here, and they are exciting, and we'll see that in a second. With that, I'd like to hand over to Dominique, who's going to take you through the numbers in some more detail.

Thank you, Stephen, and good morning, ladies and gentlemen. So moving on to Chart 9. This summarizes the group's financial results and reflects the significant impact on those results from the revenue downturn. EBITDA margins remained very strong at 26.4% in spite of the significant revenue decline. And 26.4%, this is a figure that I think many, many companies, most companies would aspire to. Why are we talking about EBITDA this year when we normally concentrate on the headline operating margin? Well, depreciation is a truly fixed cost. It's based on historic spend. And in that regard, we cannot reduce it in the short term. So EBITDA gives you a much better impact of how we've been able to move costs in response to the drop in revenue. When you incorporate the dilutive impact of the relatively fixed depreciation charge, then EBIT margins did drop by just over 6 percentage points to 12.6%. But as Stephen has already highlighted, this -- even this lower margin still compares very favorably with historic margin levels for this business. And to achieve that in a year when organic revenues dropped 20% is really a testament to how far that we've come. Moreover, the second half EBITDA margin was 27.0% and therefore better than the first half margin. And this shows the speed of action taken on costs. And it's worth remembering that this doesn't even reflect the structural cost benefit from the restructuring actions that we had largely completed by the end of the year, which will benefit 2021's results. And I'll come on to talk about them later. Cash flow, excellent again. And again, I'll talk about that a bit later. And the final dividend slightly increased, reflecting our confidence in the future profitability and cash flows of the business. Chart 10 shows the operating profit bridge, and you clearly see on this chart the negative impact on the group result from lower volumes. Worth bearing in mind, that drop in sales volume and mix there, that's in relation to a drop in organic revenues of around about GBP 145 million. And I'll come on to -- so clearly, the cost dropped significantly in relation to that, and I'll come on to talk about that again a bit later. The chart also shows the contribution to lower costs from the group's variable pay schemes, and these schemes have done pretty much exactly what they're designed to. Obviously, they are there to incentivize performance. But in a downturn, they do contribute to softening the negative profit impact on the business from lower revenues. On Chart 11, one of the highlights this year has undoubtedly been our free cash flow. Of course, there has been a significant contribution to this from the improved working capital position as a result of lower receivables from our lower revenues. And this will reverse as revenues improve over time. But you can also see that we continue to spend money maintaining our equipment. And within that free cash flow, there is also around about GBP 10 million of cash spend on our restructuring program. Overall, therefore, we achieved free cash flow conversion of 141%, and I think that is really an excellent result. And below free cash flow, we are continuing to invest in our business with continued expansionary CapEx. And the outlook for that is still positive with many new projects still coming through, particularly in emerging markets and Specialist Technologies. Chart 12, I've already mentioned our strong EBITDA margin performance, and this chart really puts it into context. So this is my fifth set of full year results. And actually, the 2020 EBITDA margin performance is better than that achieved in my first 2 years, 2016 and 2017. Now to have achieved this when underlying revenues dropped by about 1/3 overnight at the end of March and in a business which has generally been considered to be exposed to operational leverage, I think that is testament to the flexibility of the cost base in this business. Chart 13 shows the divisional performances. Overall, as you might expect, margins in both divisions were hit by the lower revenues. ADE margins held up quite well in the first half but dropped in the second half, with the full impact from the drop in civil aerospace revenues impacting the business there. AGI margins, on the other hand, were mostly impacted in the first half with the automotive plant shutdowns that we saw in the second quarter. Second half margins improved significantly. Chart 14 looks at this in a bit more detail, and it shows organic ADE and ADI second half revenues and cost development versus last year. And you see there in overall cost terms, ADE has actually done a pretty good job, cutting its cost by more than 20%. It's only the fact that the revenues -- revenue decline has exceeded the cost improvement, and that has resulted in the lower ADE margins. AGI, on the other hand, it still had a significant but nonetheless more benign drop in revenues in the second half when compared with the first half. But it actually reduced costs by more than the revenue decline. And that results in an increase in the EBITDA performance in the second half for the AGI division compared with 2019. Now ADE margins will improve as the restructuring benefits begin to feed in later this year. But realistically, we need ADE revenues to recover a little before we see meaningful margin improvement. And currently, our best guess is that ADE margins should be back above 20% by late 2022. Chart 15 looks at the financials of the restructuring program. So in the first half, we took a restructuring charge, which was more focused on the AGI business. And we've added to this in the second half, as we outlined in November, with another phase of the program more focused on the ADE business. So the total restructuring charge for the full year was GBP 52 million, and this included GBP 36 million of cash costs. The program was largely complete at the end of 2020, but a lot of the final payments to people and site clearance costs, et cetera, will only be paid through 2021. So that's the cost side of things. On the benefit side, we expect to achieve GBP 30 million of permanent annual savings from the program, with around GBP 20 million of that being achieved in 2021 and an additional GBP 10 million coming through in 2022. On Chart 16, taking a look at the balance sheet. Net debt is at GBP 23 million, and that's after paying GBP 96 million in connection with the acquisition of Ellison. Just a reminder there that we have the second and final tranche of $80 million or around about GBP 57 million at today's exchange rates on the Ellison acquisition that we will pay at the beginning of April. In terms of liquidity at year-end, we're in a very strong position, and we had GBP 228 million of available liquidity at the end of December. Headline tax rate, 22.5%, bang in line with our guidance. And finally, just to note that based on today's exchange rates, we would -- if you were looking at 2020's headline operating profit performance and translating that at today's exchange rates, it would be around GBP 3 million lower than the GBP 75.3 million headline operating profit delivered, so worth bearing in mind when projecting into 2021 and beyond. Now back to Stephen.

Thank you, Dominique. So moving to Slide 18, this slide here, I'd like to use this as an introduction, if you like, to walk through the market sectors and to see how things have moved and why they have moved. Across the bars here, you see the relative sizes of each of our main segments. And just to remember, general industrial is really a collection of everything that's not in the other 3 bars. Then you have automotive, which is principally car and light truck; then aerospace and defense; and last and least is energy. You can see from this slide that the largest parts of the business declined the least, in other words, general industrial and automotive. By the time they've gone down, they'd come back up again, actually have recovered quite strongly. And they're well advanced in recovery mode now. The aerospace and defense segment is a more complex path, and I'll come to that in a minute. But just a word on the context of this. Dominique referred to losing the revenue overnight. I was sitting behind my computer screens in early April, and they were lighting up with notifications from customers as they were closing their doors all around the world. It was amazing. It reminded me of standing on the hills of Hollywood, looking over Los Angeles actually as the power cut went through the city and all the lights went out. It was amazing. It's phenomenal, but that's what happened. That's why the demand fell. Our light stayed on, by the way, we -- even in jurisdictions where closures were mandated except for essential services. And the reason for that is that we were designated as a provider of essential services to industries that were required to keep going during any shutdowns. So if we walk then into general industrial and have a look at this business. Don't forget this is a proxy for industrial production. You can see from the chart that we've got the quarterly progressions through the year, and you can see how they've moved for this business. It's a collection of lots of different subsegments. Some were moving up from the beginning, like the medical side. Others were going down quite strongly. Overall, this is a very diversified segment. In general, North America is stronger than Western Europe, but a highlight in the general industrial area is emerging markets. And you'll us talking about that when we come to the end of this presentation and what's featuring in the emerging markets side. Moving to automotive. The automotive business, I mean, wow, did it go down fast, OEMs shuttering their plants, no production at all. And now it's come back very strongly in second half. In fact, the Q4 automotive revenues are the same as Q4 2019. And we're building up capacity. Part of our plan here is building up capacity in Eastern Europe, and that's continued. And that's aimed at electric vehicle production. And I'll talk a bit more about the strategy behind this stuff in a minute. Aerospace and defense, probably the most complex story to try and get across here. So it's come down across the year quarter-by-quarter. This is principally civil aerospace. Civil aerospace makes up about 75% of this business. It's now stabilized at an exit revenue rate of about 43%. The -- going forward, what we're looking at here is we expect narrow-bodies to recover faster and when they do recover, to move very quickly. The actual value-add that we get per engine is irrespective of whether it's a big engine or a small engine because the price that people pay is to do with the work that we do, not the size of the component. The reason why the narrow-bodies aren't expected to come back faster than we expect is it's part of this secular trend of point-to-point transport. The transportation using small planes to go to a hub and then transfer to large planes to go longer distance has been under pressure for quite a lot of years now. And there's been downward pressure, therefore, only the wide-body planes and the large passenger capacity planes that are there. We traditionally were focused much more heavily on engines and landing gear for wide-bodies than we were on narrow-bodies. And part of our strategy has been to move towards narrow-bodies, which entails moving a lot more exposure to North America, which is where you have the narrow-body engines dominating in terms of production and also Safran in France, which is part of the CFM alliance. And that's an ongoing trend. What's happened here is that the pandemic has probably accelerated it, and that's something that we will see continuing going forward, we believe. Just a word on how we see revenues moving and the path. What we're anticipating, and of course, we don't have a crystal ball, we're anticipating in our outlook here is that the civil aerospace recovery, we won't see anything material in 2021. But we do expect to see revenues in 2019 exceeding -- in 2023 exceeding 2019 levels. So we're going to see things start to move quite strongly in 2022 is our actual planning base here. Then finishing off with energy. This is now a very small part of the business. We've always said in the past that we aren't investing in the onshore oil and gas extraction business. The offshore business, which is actually primarily subsea production and a lot of gas, has been quite robust. And the reason for that is these are long-time wave projects that we work on. We're watching it. I mean, it has been impacted, but we'll just see how that goes. But once again, onshore oil and gas, which for us is primarily Permian Basin fracking, we don't anticipate investing in that anymore. So if I just come to the restructuring and strategy part of this presentation. This is the program. There's a lot of moving pieces here, so I do apologize for it -- being having a lot of detail. And we can talk more about it later on. But we have already said that we started this program in 2019 before anybody, or at least I, could spell pandemic. It was something that we were moving into. And we started with the restructuring in Western Europe and moving away from internal combustion engines, which were primarily in Western Europe-targeted Tier 3 and Tier 4 suppliers in the supply chain, and moving towards Eastern Europe, where we have electric vehicle production being set up by OEMs and Tier 1s. And we've been moving our footprint to service not only a different type of vehicle but also a different class of customer. And it's a lot more stable at that level and a higher value add. In total, this program has seen 15 closures, 3 new facilities started up in Eastern Europe. And just to note that the redundant capacity we have, and that's a feature through all this business because we've not got rid of productive capacity in terms of equipment. We've kept the equipment. We just moved it. So we got rid of buildings. We got rid of infrastructure, but we haven't done anything with the process lines. And we've moved them to a different location. And in the recovery phase here, that redundant capacity is being transferred to Eastern Europe or sister plants in Western Europe. And where there is no immediate demand for, for example, heavy truck and bus, who knows where that's going, this equipment is being repurposed for general industrial, where the market is very large. In 2020 now, we've expanded the program, and this is ongoing. I mean, the aerospace realignment is something that we're still working on. And just as a general note that the restructuring plan is largely complete, Dominique already said that. The -- but in 2020, we continue with this because it's just happening in some areas of the world where it's harder to do things quickly. I'm referring here to what I would call the social democracies of Europe. In total here, we've closed 1 plant in North America. We've closed 1 in Belgium and 2 in the United Kingdom. And that actually is part of this refocusing towards the narrow-bodies, which predominated in North America and, to some extent, in France. The current underutilized capacity is being pushed heavily at medical and GI markets. And then we've got the oil and gas side and some legacy plants in North America. You will recall that we had some plants, one in particular that was a real boat anchor in North America. It's been around for a long time. Some of us used to call it the gates of hell, and that is now closed. In total, the -- this part of the program is the closure of 7 facilities with 2 new facilities coming on stream. In total, 26 plants closed or in the process of closing and 5 new facilities. So if we look at this program in 2 parts. One is the immediate cost reduction, which clearly happened quite fast. And where we are now is you will recall that we like to have a buffer of temporary labor because it's much easier to make those changes with temporaries than it is with permanents. And in some parts of the world, of course, our North American countries, we can actually say that everybody is a temporary worker. It's the way that industry -- economy works. But -- so we concentrated these more in Europe on the temporaries, and we are refilling that pool as demand recovers here back up to our ideal target of 15% of the workforce. But it's an important point. The restructuring program is a lot more than a reaction to the immediate situation. It's part of our ongoing strategy, and what we've been doing here is following this alignment with these long-term mega trends. And I can sort of encapsulate this quite quickly in terms of, well, what does it mean? What are we doing here? What we've had to do, because of the demand fall, and how to -- it actually justifies it, is that we've taken about 6 years of strategic evolution and we've condensed it into 1 year. And clearly, that's not because we have some kind of super reins, where we just had everything -- we just whipped it out on the fly. This has all been in line with where we've been going in the longer term anyway. Now moving to Specialist Technologies. I could have put this slide right up front because it is a very important part of our story. It is a strategic part of our story, and it is a main pillar of our strategy. And nothing's changed in that. What I didn't want to do is to get this mixed up with a restructuring program because there isn't one in this part of the business at all. The -- you can see there the profit now of Specialist Technologies as a percentage of the whole. It's grown to 48%. That's got to do with the -- starting from a higher point of margins than Classical Heat Treatment. It did get dented a bit, particularly in aerospace and defense, but we've been talking about this as a relative performance in terms of growth versus Classical Heat Treatment. And that has been preserved in this extreme downturn that we've seen. And we will see these things still growing back up and keeping going. And this is a long-term, exciting story. And then last but not least, the emerging markets, really rebounding hard here, growing very, very well. China revenue is up 16% in the second half. Emerging markets is now about 12% of our total group. We are increasing our investments in the emerging markets as we are in the Specialist Technologies, so expect to see more facilities, more capacity, in fact, in the emerging markets in the years to come here. This is where we will reap a lot of growth and a lot of profitable growth. So if we look to the future here, let me just give you a vision of tomorrow. I mean, I don't want to do it for next month because this is longer-term stuff. It's very exciting, I think, but then I get excited about these things anyway. We are accelerating our growth. We're keeping them in line with our strategy, following these secular mega trends, following the things we've been telling you about all along. And we are going to be reaping the benefits of the efficiencies that we've got out of this restructuring. And the permanent cost savings that we've achieved, which, once again, just to bang that home, that's all about removing infrastructure and people associated with that infrastructure. And that's a permanent reduction. We are an increased flexibility and increased efficiency business. So all of these things point to a better, higher-quality business with very exciting long-term prospects. So moving on to the outlook statement. You've got the outlook statement there. That is in the documents. All of them have been published. But just at the bottom line, we wanted you to take away from this that this is a transformed business. We've proven resilience. Now we need to start the conversation with everybody about the future and the growth that we see. With that, thank you very much, everybody. We will move to questions and answers.

[Operator Instructions] Our first question comes from Harry Philips from Peel Hunt.

Just a couple of questions, please. Just in terms of looking at the aerospace run rate into '21, minus 43% in the second half of last year. Is that an ongoing assumption into the first half and beyond for '21? And then secondly, the split of the restructuring gain of GBP 20 million anticipated in '21. I'm assuming more of it will be in aerospace, reflecting the sort of later execution of that program. Would that be correct?

Yes. Harry, I'll take the first part on the run rate, and Dominique will fill in the details on the split of the gain. The exit rate from 2020 here is where we started. I mean, we plateaued at the end of 2020. What we're seeing, a little bit of tick up, and you will have seen the news flow in terms of how the production is ticking up a little bit. But with -- our best guess right now is we won't see a material benefit from that upside. But if it comes, it will come with a lot of drop-through. But in terms of what we're talking about, our numbers for the outlook, we're not anticipating much of a material upside to this, certainly not looking at going down anymore. Dominique, would you like to take the gain?

Sure. So on the restructuring, I mean, overall, Harry, there were more AGI facilities shut than ADE facilities. So in terms of permanent structural cost savings, one would expect more of that to be in AGI than ADE. And in terms of timing, absolutely, the AGI benefit will be coming through in 2021. The ADE benefit, there will be a little bit of benefit in 2021 but mainly in 2022.

Our next question comes from Andrew Douglas from Jefferies.

I have a few questions, and I'll jump back in line and ask the remaining. With regards to Specialist Tech, clearly, an important part of your strategic evolution, can you talk to us a little bit more about kind of where we are across all of the technologies, whether there's going to be a focus on specific ones with regards to capital allocation going forward? I'm assuming it's more on the AGI side. And just also whether there's a few more in the pipe, where we've seen 1 or 2 of these things evolved over the last kind of couple of years? I wonder if there's any new ones. Secondly, on emerging markets, clearly, lots of runway of growth there. Can we just double check kind of where and how quickly that could come through? I'm assuming it's more of the same in the chosen regions that you are currently focused on. And then last but by no means least, outsourcing opportunities in auto, just wondering where we are there? And also, if you can give us a little bit of an overview of how you're seeing the M&A market, that would be really helpful.

Okay. Thanks, Andy. So where are we on investment in terms of Specialist Technologies? It's something we'll be pushing forward in '21, '22, '23. You'll see us putting in investment actually in some of the technologies that are currently more heavily weighted into aerospace but pursuing things like medical. And we've got some stuff in the pipeline on that, particularly things like hip services. So you'll see some of that coming through, the Specialist -- especially S3P, I can't even say it anymore, the stainless steel business. That is something that's growing leaps and bounds. I mean, that is showing tremendous growth forward. That's an AGI-focused business, and we will certainly be going hard and heavy on that. So it's not only pushing after AGI stuff, but it's also whilst we're waiting, if you like, for demand in the civil aerospace market come back, we are going to be pushing the Specialist Technologies that are more heavily weighted there into other areas. And things like medical are just a hand-in-glove fit for that. Any new Specialist Technologies? I think we've got our hands full with the ones we've got. Frankly, we don't need anymore. And so we still got stuff in the closet, but that now is not the time to deploy it, frankly. Emerging markets, your question was, is it more of the same as we've seen in the past? And I will say, yes, but a plus on top of it. So we are going to be increasing our greenfield build situation in emerging markets. In some of the markets, as you know, we've said there's absolutely nobody to buy, and the emerging markets is a classic for that. We'd love to have been able to go and buy ready-made facilities to service the emerging markets. But it's been -- there's nobody to buy that actually has been -- had market share that we could go for or anything that was worth it in the past. So we've always built from scratch. We're looking at things a little bit differently now. The hardest area to do this in was China. And one of the problems in China in building new greenfields is that it takes about 2 to 3 years to get the permits in order to get one of these facilities up and running. It's very difficult. Basically, it's to do with the amount of people that you employ and the amount of energy that these businesses use. And the Chinese actually like you to employ thousands of people. And that's not -- per facility, that's not our trademark. But there are thousands of facilities in China, just very poor quality and poorly manned, but they do have permits to operate. So we are looking at an acquisition strategy, frankly, of acquiring businesses and then revamping them. And it seems that, that could well speed up our China expansion quite dramatically. And I know our China team is very excited about this. We've got a lot of things that we've identified, and we've got a great team there now. And it's quite strong. So we'll be pushing that very, very hard. Outsourcing, that's not something that -- I don't make promises about outsourcing. These tend to be very difficult things to happen. We may see an acceleration in outsourcing from -- going back to what I started with the presentation today. There's a lot of people trying to reduce their carbon footprint. Giving us their business is a great way of doing that because they just -- we take the total carbon down for them. And that includes their so-called scope 3, which is our supply of it. So you add it all up, their carbon footprint goes down. And there's a lot of pressure on that. So we might see an acceleration on that. But these things have historically been like turkeys voting for Christmas because it's the people working in the plant they want to outsource that ultimately say what the risk is, and they're quite reluctant. So it takes typically a CFO to say, "Well, let's look at the returns. We want these to be variable costs rather than fixed costs." That causes that decision to happen, but we may see an acceleration of that. Lastly, on M&A, I think that was the last point you made, and sorry to drone on here, the M&A standpoint. So it is certainly true that we are getting inbounds now from folks that weren't interested in talking during the depths of the pandemic. I think what they've done is they've weathered it through, but life looks a little difficult, if I might say. The problem I've got is the ones that I've looked at in detail are pretty close to insolvency, and I'm not sure that, that's necessarily a business that we want. But there's certainly more inbounds coming in. And we'll see. I mean, we aren't desperate. We aren't going running after them. I don't perceive us buying a transformational business at this point in time. That's not where we're going. We've got very good platform here, very excited about where we are with Ellison. I mean, it's -- in the circumstance, it's been integrated extremely well. And the folks in that business, they're all charged up ready to go. And we've actually seen quite an improvement in the efficiency in that business, which we didn't figure in our calculations for the returns on it. This business is actually -- it was an excellent business. It's now just a very good business in terms of future potential. I hope that answers your questions, Andy.

Our next question comes from Andre Kukhnin from Crédit Suisse.

I'll go one at a time, if that's okay. Can I come back to civil aerospace? And your message on where the run rate and what you expect for 2021 is crystal clear. I just wanted to get a bit more color on what you're seeing in terms of those stocking and destocking dynamics that we were witnessing kind of at the midyear, where the run rate for OEMs, their airframe is worth one level, the supply chain was at a different level. There was some preservation of that. So the stock was being built. But at the same time, I think they were destocking at their own component level, which was impacting you. So I'd just love to know what the state of this kind of system is now as we enter or have entered into 2021, please?

Sure. Thanks, Andre. The -- so let me try and put this in a nice, sort of simple way because -- not that anybody is stupid, but it's very, very complicated. You will have seen releases, press releases, for example, from Airbus. They've raised their production rates in terms of their deliveries of claims and in other parts, so the narrow-bodies, particularly the people starting to raise their production rates. The wide-bodies are flat. So how does that come through the system? We are expecting the narrow-body work to pick up. The acceleration on the narrow-body work will be fast when it comes. Has it hit us yet in terms of -- are we seeing a build coming through to us? The answer is no. And I think that's because they're -- throughout the pipeline from -- all the way from sort of planes on the ground with no engines fitted to the supply chain where they basically -- they've got stock and they need to start moving that, that's going to take a little bit of time. So we haven't actually seen that come through yet, which is one of the reasons why when we started talking about this, we've always said that our outlook here, even if the plane build rate goes up because don't forget we've got exposure to aftermarket, flying hours, in other words, and playing build, even when people start doing that, we will be a lag in terms of that because of the pipeline of stock. And that's something that will erode that stock through the year and start going to normal production rates by the time we get to the end of the year. That's our view, at least. But I've been wrong before.

That's very helpful. And the second question I had was on the Eastern European capacity additions for electric vehicles' propulsion or other parts. Could you quantify that at all or give us any sense of how large these facilities are, the average size, just to think about the potential revenue opportunity maybe?

Well, Andre, you know me well. I'm not going to quantify. If we were going to, I'd have Dominique do it. But it's actually -- I know what you're looking for. The problem you've got is that the EV production is 3 years down the pike because what we're doing at the moment is quoting on RFPs, requests for proposal, for production that is yet to happen. And so we're running components. They're large facilities. They're modern facilities. They're beautiful facilities. They are -- when I say EV production, there's a lot of stuff on electric vehicles that is generic. So you don't need to have a very specific EV production facility. But you are producing steering gear, which doesn't matter what it's going on to. It's going on to EV or it's going on to internal combustion engines. And then there's EV-specific stuff. And that -- those 3 plants in Eastern Europe that are coming on stream, they're really looking at EV-specific stuff. But in the meantime, whilst we're waiting for EVs to actually become a meaningful part of the market, they are doing automotive and general industrial work. But it's largely automotive that is playing across the entire sort of vehicle-agnostic type of supply chain there. So the absolute capacity at this point in time, too early to actually hand that data out. But they are very productive plants, and they are larger than the average because they're brand new.

Got it. And final question, just on -- is on pricing dynamics. There was quite a lot of kind saber-rattling during the thick of the downturn in terms of asking for discounts from all sorts of OEMs across your customer list. Could you update us on where that landed and what you're seeing for 2021 in terms of your pricing dynamic?

I don't see us being any different from where we are normally. We've not really moved on pricing. In some specific areas, we've had a little bit of a temporary giveaway just because when customers are in trouble, it's not a great idea to sit there with your -- sort of your chest out being indignant. So we have actually given people some support during 2020, but it's been temporary support. And that's gone now. So we would see the pricing being robust going forward. And as we normally talk about, it's going to be ahead of our cost inflation. Can't see that being any different.

Our next question comes from Michael Tyndall from HSBC.

Just a couple from me. I wonder, can we just go back to Specialist Tech for a second? I mean, it looks like it had comparatively a really strong year. And I guess maybe this is my stupidity, but I thought it was very much exposed to A&D. So I'm just trying to reconcile how it did very well in a year when A&D wasn't so strong. Is there something else? Can we talk maybe about what the end markets are that are doing particularly well there? I think you've already mentioned medical. And then I guess a question around inventory levels or restocking in general industrial. I know that we're sort of waiting for that to happen. Any indications, I guess, in your order book that might be on the cusp of happening? Or when, in your mind, do you think you'll have clarity or at least your customers will have enough clarity to think, "Okay, it's time to start putting spare parts on the shelf?"

Thanks, Mike. Yes, good questions. So let me -- I'll take the inventory question. And Dominique will take the Specialist Technology question, mostly because there's a lot of mechanics in the numbers on that, and I don't want anybody to be misled. On the inventory level, so just to remind everybody, our lead time, customer lead time on deliveries, we call it turn time, from the point of getting customers' products to delivering them out, is typically between 3 and 7 days. And we don't have sort of the order for that stuff more than a week ahead of time. What we have is a blanket order that says, "We are going to be buying from you for the next however many years or months." And when the work arrives effectively is when we get the purchase order for it. So we don't have order books, and we don't have inventories. So we don't get visibility out of order books. So where we get the visibility from is watching the dynamics of sort of 40,000 customers and I think it's -- I don't know, 700,000 was the last time I looked at it, orders per annum a lot. There's a lot of data in there, and that's where we get a lot of information from. And we survey customers' attitudes. As far as inventory levels are concerned in the supply chain, what we try and do there is look for discontinuities in sales. So you know that if you see an overnight move in a particular region or whatever, it is an indication of restocking or destocking because the large numbers of customers don't move like that. So it's got to be a stocking-destocking situation. And I can say in general industrial, what we're seeing is there's no inventory at all existing in medical. I mean, those guys have played out, I mean, as far as I can make out. I mean, they're desperate for deliveries. There's -- some of the pharmaceutical production lines, there's no inventory. These guys are just screaming, "Send us, send us, send us." The -- in other areas, because this is a very mixed business, yes, we are starting to see agricultural equipment, where that area is possibly picking up. But it's -- these are all sort of slices of general industrial. I wish I could be more helpful to you, but you chose the one market segment that is the most diverse that we have, okay? So let me give you to Dominique, and he will sort of walk through the Specialist Technologies story.

Sure. Well, I guess, I mean, the first thing to say is, obviously, Ellison is a specialist technology. And therefore, that's contributed to the Specialist Technology revenues. And that's the reason for the increase of Specialist Technologies sales as a proportion of the total. Because as you've rightly said that all things being equal, the exposure within Specialist Technologies is more geared towards the ADE side of the business -- of our business than the AGI side of the business and given that, that is the side of the business that's been harder hit underlying, then one might have expected that to have an impact on Specialist Technologies revenues. So you've got Ellison contributing there. But if we unpack that and look within the AGI division, we had growth in our AGI-focused Specialist Technologies, revenue growth of 8% during the second half. So that compares still very favorably with the more than 10% revenue decline that we saw across the automotive and general industrial, Classical Heat Treatment revenues. And similarly, on the ADE side of the business, we had organic revenues, excluding the contribution of Ellison, declining 33% during the second half. And that compares again favorably with the 40% decline that we saw in the comparable organic aerospace, defense and energy, Classical Heat Treatment revenues. So there is outperformance. And then overall -- there's outperformance in each of the individual divisions. And then overall, the numbers are clearly boosted by Ellison.

Our next question comes from Jonathan Hurn from Barclays.

Just a few questions for me, please. Just firstly coming back to civil aerospace. Can you just give us a feel of the current split within your business between narrow- and wide-body and how you think that kind of develops over the next few years, please? That was the first one.

Jonathan, yes, I knew that question was coming. The problem I've got is that things are moving so fast, I don't have the numbers at hand, that is for sure. I can tell you that -- and before we got into this, this last year in 2020, that we had something like 70% of it was on wide-bodies in one way, shape or form, a lot of it focused in the U.K. but also in other places. And the narrow-body side of life is really the LEAP-1B and 1A engines. So that's the Airbus A320s, the GE stuff. And that's grown dramatically because we've got 3x the share on those engines than we had on the predecessor, CFM56s. Where the split is today? I don't know. But what I can tell you is that the U.S. business, which is where the predominance of the exposure is to that business, not including Ellison even, is much larger. And if you put Ellison in -- on top of it, then it really dwarfs it. I mean, Dominique, what's the North American civil aerospace revenues now, please, including Ellison?

Give me a moment, and I will look it up.

That noise you can hear is his brain working. We'll come back and give you the answer, I think. Anything else you want, Jonathan? We'll come to the answer on this call. We'll give you the answer on the call.

Okay. Perfect. The second one was just coming back to EV. Just looking at -- do you have the same customer penetration in EV as you do in the IC? Or are some customers more or less important? And also, just following on from that, as we kind of look at EV versus IC and obviously, the services you provide to that, is there any real difference in margin between the 2? Maybe does EV have more sort of Specialist Technologies that allows you to sort of generate a higher margin?

Yes. Good question. The -- so taking them one at a time, customer penetration, so I can tell you that our penetration of Tesla is 0. And that is deliberate because what happens with the strategy that Mr. Musk has in that business is that he gets suppliers to set up, and they pilot what his designs are. And once they're running, he closes that down and move it in-house. So we saw that coming from a mile away. And so you can pump a lot of money into supplying Tesla. And overnight, you lose business. That's happened in -- on the West Coast. It's currently happening in China. So we have 0 of Tesla, and I don't expect to go into that. Let's say 0. We've been doing things like some of the e-beam welding that they needed and stuff like that but nothing material. So the rest of the world, where is our penetration? Well, North America doesn't really have a huge desire for EVs other than people wanting to drive sporty vehicles at the moment, if I can put it that way. I mean, half my family is American, and I've got lots of relatives there. They still like their big trucks and pickup trucks and all-wheel drive vehicles. I mean, it's sort of a -- I don't know, it's part of their lifestyle. The only reason they go and buy a Tesla is because they want something that goes from 0 to 1 million miles an hour in a couple of seconds and breaks your neck. So that's the kind of motivation. But in Europe, it's a different dynamic. So the penetration that we've got in the EV world today -- is with the primes now is primarily with the likes of BW. So we have one plant that is virtually dedicated to EV production with BW. But back in North America, we are a supplier to General Motors, who've just laid out their store publicly. Yes, actually, they're moving quite strongly to EVs. And remember that a lot of people thought that EVs didn't have transmissions. They didn't have gears in them. You'll see from our automotive slide there, there is -- that's actually an electric vehicle transmission with the gears. That's the stuff that we do in North America. So we will see as the North American electric vehicle market grows, non-Tesla market grows, we'll see quite a good growth there because we're already in with the OEMs. I hope that answers that question. The margins question, our Specialist Technologies are the processes of choice for electric vehicles. You've got low pressure carburizing. And in fact, one of our technologies, which is not classified today as a specialist technology, which is gas nitriding, they have margins that are similar. I mean, these Specialist Technologies and indeed gas nitrating, similar kind of margins. And those 2 technologies are very much the technologies that the EV guys want. And now we're talking about the EV-specific stuff. We're not talking about sort of steering gear and braking systems and stuff like that, the EV-specific stuff. It's gas nitriding. It's low pressure carburizing. It's low-carbon footprint, highly efficient, very nice margin business. There's also things like corridor process, which is a corrosion prevention thing. But it's all about lightweighting. That's why they use those processes. Does that answer your question?

Right. That's very helpful, indeed.

Just coming back on the North American civil aerospace revenue, that was GBP 67 million last year in 2020.

Great. And then maybe I could just have one final quick one. I know it's a very small part of your business. But just how are you thinking about the outlook for the oil and gas side? Obviously, oil prices of above $60, just your thoughts on any sort of recovery coming through there, please? That's the final one.

Yes. Jonathan, so oil and gas has always been -- onshore oil and gas has -- if you know how that works, you're better than me. We don't have an outlook on that. I mean, we've always been prepared for any eventuality in onshore oil and gas. So it's just there. Where it goes, I think you're better off talking to people that are specialists in that because I've given up trying to predict it.

[Operator Instructions] We currently have no further questions, so I'll hand back to you.

Yes. We don't have anything on the web either, so that's fine. Just a sort of final point I'd like to make. There's been a huge amount of activity that's gone on in the last year, and we've really sort of covered this quite fast in a very high level. There's a lot more information in the documents, particularly in our annual report. And clearly, if you want to know more, then give us a call. We're there definitely. I've got -- just got a question come in from Dominic Convey, I think.

We have another question registered by Dominic Convey from Numis Securities.

Sorry, I got bumped off the call and just had to reconnect. Just wanted to ask about the profit bridge for 2021 and the key building blocks and specifically, how much of the GBP 15 million of bonus/share-based payments you'd expect to accrue this year if current consensus are right? And secondly, just how we should think about the broader shape of profit this year, given the moving parts, obviously, the timing on the restructuring cost savings, perhaps the unwind of the temporary cost savings, I assume? And again, the phasing of your various end markets, how do you think sort of first half, second half might fare relative to previous years?

Okay. That sounds like a question for me. So first one for the profit bridge for the full year, there are 3 parts to this. So there is the GBP 20 million of structural savings from the restructuring program that we will benefit from this year. The second part is the fact that we will have bonuses and debt accruals coming back now. The GBP 15 million was the differential compared with the 2019 figure. The target bonus in bps is actually a little higher than that. So the figure that we've been using is GBP 18 million. So you've got plus GBP 20 million from the restructuring, minus GBP 18 million from the additional bonus in bps, leaving you a net GBP 2 million. The third element is a fungible element because it depends on the revenues. Because as revenues strengthen, as Stephen highlighted when he was talking about the business, we will need to take costs back on to service that extra revenue. So the rule of thumb is that when you look at organic revenue growth, and there, you have to strip out an extra GBP 7 million or so that you get for Ellison in terms of contributing to first year -- sorry, first quarter revenues this year, but on organic revenue growth, rule of thumb, you should expect at least a 50% drop-through of that. So that's your bridge from 2020 to '21 profits. In terms of the first half/second half split, honestly, I have not worked through the detail of that yet. But clearly, the first quarter of last year was a relatively normal quarter. So we're anniversary-ing against some reasonably strong profitability in that quarter, and we will be seeing revenue declines against that in the first part of this year. And we will have the restructuring program delivering -- growing through the year. So in terms of year-on-year numbers, second half will certainly look better than first half.

Thanks, Dom. Hopefully, we'll talk to you soon. I'll get back to finishing off then, if I might, which is just to say thank you very much, everybody. Appreciate your time and coming to listen to us and talk soon.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.