Bodycote plc (BOY) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Bodycote plc 2021 Interim Results Call. [Operator Instructions] I will now hand you over to your host, Stephen Harris, Group Chief Financial Officer, to begin. Stephen, please go ahead when you're ready.

Good morning, everybody. Just to correct Maxine that I am not -- haven't been promoted to the Chief Financial Officer. I'm still the Group Chief Executive, I'm afraid. But I am here in person, and joining me this morning is, in fact, Dominique Yates, the Chief Financial Officer. We will take you through what is a nice set of results, I think, this morning. And I'll just give you an overview to start with, then hand over to Dominique, who will go through the financial review. And then I'll come back and we'll take a quick look at the business on a broader scale and what we've got in store for the future. So moving on, if we look at the actual results, clearly a strong profit and cash performance. So we had revenues up 5.9% constant currencies. And on the back of that, we actually had profits up 35% to GBP 48.7 million. Nice margin coming through. And as we'll see as we move through this presentation, a very, very good set of efficiency improvements, combined with our restructuring, giving us gearing that's actually well over 70%. Coming back to the margins for a second. I'm very happy to say that AGI margins are above 20% for the first time, and we'll talk about that a bit more going forward. We're delivering very well in terms of our strategy, and you'll see our Specialist Technologies and the Emerging Markets doing exceptionally well. We've raised the dividend, and indeed, today, we're raising guidance for the full year. So just looking at the performance very quickly in graphical terms here. You can see the revenue increase there in the first half compared with 2020, but still below 2019. And the good margin improvements, as I've mentioned, coming through from the restructuring, but also a lot of efficiency improvements. And you can see the full-time equivalent headcount there are falling. And of course, we've got more restructuring that will come through, and we'll be holding these efficiency improvements going forward. With that, I'd like to hand over to Dominique, and he'll take you through the financials.

Thank you, Stephen, and good morning, ladies and gentlemen. Chart 7 summarizes the Group's financial results. Obviously, last year's first half comprised two very different quarters. Our revenues in Q1 this year were still well down on last year's numbers, while the second quarter's revenues were significantly up. The net result was an increase of 2.0% at actual rates or 5.9% at constant currency. Stephen has already highlighted that the growth in constant currency headline operating profits was 35%. So given that that is significantly in excess of the 5.9% revenue growth, margins improved significantly from the low base of last year. And following on from that, profit before tax and earnings per share both reflects this increase in headline operating profit. Cash flow was strong again. I'll come back and talk about that later. And given the increased profitability and earnings, the Board has decided to increase the interim dividend from 6.0p to 6.2p, which will be paid out in early November. Chart 8 shows the operating profit bridge. Here, you can clearly see the benefit from the strong operational leverage and restructuring on the volume and mix result. It also shows that, as anticipated, variable payers returns to the P&L. There's been a lot of commentary on inflation over the last months, and we've certainly experienced some energy cost inflation in some geographies. We have a long and proven track record of managing this and have again successfully passed this cost inflation through. There are some signs of wage inflation in certain geographies as well, and as they materialize, these will also be passed on in due course. Chart 9 looks a little deeper at the restructuring. By the end of June, we had shut 19 facilities; 14 in the AGI division and 5 in the ADE division. The remaining 7 facilities in the program will be shut by year end. And the 3 plants, which have facilitated elements of the restructuring program, are all up and running. Cash restructuring costs of GBP 8 million in the first half are in line with the provision. And in terms of results, headcount is more than 1,000 FTEs below the January 2020 pro forma headcount, and this is despite business recovery from last year's troughs in many areas. So we're on track to realize the GBP 20 million of net restructuring benefits in 2021, with a total benefit of GBP 30 million in 2022 as we get the full annualized benefit from the restructuring right from the beginning of 2022. Chart 10 shows the divisional split and, unsurprisingly, reflects the different experiences of the two divisions. AGI revenues and margins are both up sharply, while ADE's revenues and margins are down. Analyzing this a bit deeper on Chart 11, we take a look at the results in a broader context. The restructuring program in AGI was already underway by the time the pandemic hit. Also, as you can see from this chart, revenues recovered more strongly. So they were only 9% down on an organic basis versus half 1 2019. As a result, profits have bounced back very strongly, and we're above 2019's level with, as Stephen has already said, the margins surpassing 20% for the first time. ADE has yet to benefit significantly from the restructuring, and organic revenues are still some 30% down versus half 1 2019. So, despite them having done a good job on cost reduction, revenues and profits are down versus last year. It is worth pointing out, though, that the 14.6% half 1 margin in ADE compares favorably with the 8.6% that we achieved in the second half of 2020. Even with the benefit of restructuring coming through by the end of this year, we will still need some revenue recovery, though, to get back to the historic profit and margin levels that we've seen in the ADE division. Chart 12. So once again, we've seen strong cash flow performance in the first half with free cash conversion of 124%, which is really excellent. In fact, the only reason it doesn't look better than last year's is down to the exceptional working capital inflow in 2020 associated with lower trade receivables as a result of the drop-off in revenues post the pandemic. On Chart 13, taking a look at the balance sheet. Net debt is at GBP 70 million at the end of the half. And this is after we paid out GBP 37 million of dividends in the first half and the remaining GBP 58 million for the Ellison acquisition. And financial leverage is a very manageable 0.5x. We've plenty of liquidity, and we extended our credit facility by a further year. That matures now in 2026. Our headline tax rate at 22.5% is in line with guidance. And based on current exchange rates, we'll face a small currency headwind in half 2 versus half 1, but the impact on headline operating profit based on today's rates should still be less than GBP 1 million. Now back to Stephen.

Thank you, Dominique. So just turning to our ESG agenda, a note on social and governance. I think we score very highly in that area, and it's really very good. I'd like to focus a bit in this presentation on the climate change aspects of the business. So as we've said before, we are on the path to net zero emissions in line with the Paris Agreement, and we're currently doing a fair bit of carbon accounting. So we're developing our science-based targets, which hopefully will get sorted out fairly soon. And we are assessing and managing our climate risks in line with the TCFD, the Task Force on Climate-Related Financial Disclosures. Our carbon reduction plans are moving ahead still. We've been doing it for some years, and our plans are progressing quite well. A big focus for us is two areas. One is moving fuel sources to electricity where we can and away from natural gas. That gives us the ability to take advantage of green energy when it's available. And basically, the electrical -- we'll actually fuel processes that we use -- have a much lower carbon footprint anyway than the natural gas-fired processes. And actually, in the photograph there on the right-hand side of this slide, you can see a processing unit, which is called low pressure carburizing, is the comparative process in Classical Heat Treatment would be atmospheric carburizing. Low pressure carburizing is one of our specialist technologies. And if you saw atmospheric carburizing, you'd see very visibly a whole bunch of flames belching out everywhere. And as you can see, low pressure carburizing is a very clean process, much lower carbon footprint. And it's definitely the way that carburizing should be moving in the future, and we're pushing it very hard. And another key aspect of our business is that it's not just about driving our own carbon emission stat. In fact, far bigger issue, and far more important, probably, is helping our customers to reduce their carbon emissions. And simply put, if we can take work the customer is doing in-house in a so-called captive, we often are able to achieve between 10% and 40% reduction in the carbon footprint they had by doing it in-house in our business. And if we can move them over to our cleaner processes, it can even be more than that. So it's a big move for us. And I have to say, not only is it good for the planet, of course, it's also good for our bottom line. So just moving through to the actual business financials and the progression in different parts of the business. Unusually I think for us, we're showing you quarterly progressions to date. We don't normally do it, because unless there are big movements between quarters, it's hard to see through the seasonal variations. But here is the Group revenue progression on a quarterly basis, and you can see the shape of the recovery that we're seeing. Interesting to point out, even though we've got some recovery happening, our Q2 run rate is still 10.6% below 2019. So there's a lot more to come yet. And then just pulling that apart into the various markets of the business. You'll note, first of all, that I'm not showing energy. Energy is now quite a small part of the business. And indeed, a number of the subsegments in general industrial are at the same size or larger than energy. So I don't think there's much point in talking about it separately. But here we do see the main areas: general industrial, automotive, and aerospace and defense. And the key point I think to take away from this slide is general industrial is recovering the best, and it's also the largest portion of the business. So looking at each one of those in a little bit more detail. General industrial year-on-year growth 9%, showing steady growth. It's actually now almost back to -- it's within a hair of the 2019 levels, which is good. There are no major differences in growth between territories, so this is a general growth right around the world. It would be faster, we believe, were it not for the supply chain constraints that are out there. And it's fairly evident that there are raw material shortages and supply chain blockages right around the place. So there's some restocking going on, but not anywhere near as fast as our customers would like to do it. At least that's what they tell us. Another interesting piece in the GI business here is we look at one of the particular subsectors, which is tooling. And we like to look at tooling because it tends to be a leading indicator for automotive. So what happens in tooling today happens in automotive in 1 or 2 quarters in the future. And it's a pretty good indicator, generally. I think the important point about the tooling subsector is that it stalled in early Q1, which is a little bit of a canary saying that automotive was going to slow down. And indeed, if we go forward and look at automotive, you can see here what happened. And indeed, in Q2, we started seeing automotive softening. And I think going back to the tooling lead indicator again, we haven't seen any growth resume yet in tooling, and that sort of tells us that the run rate from where we are today is likely to be flat for the rest of the year. We will see a little bit of a slowdown in the summer as usual with summer shuts. But when it comes back in Q4, we're not expecting a net growth particularly in automotive. There might be a small growth, but we're not expecting net growth. And that, in fact, is backed up by conversations that we have with some of our strategic customers. We have a very good relationship with General Motors, I think most people know. And the information they've been giving us is even though there's an expectation that the chip shortage, the semiconductor shortage is going to start to alleviate sometime in Q4, at the end of Q3, they're not expecting to ramp up production that quickly because they've got to get the supply chains moving. So it doesn't happen overnight. So when the semiconductor situation does start to ease, we're likely to see the growth in automotive resume in 2022. And the information that we received on that is, quite frankly, is be prepared to do a lot of work. And the reason for that is the demand is strong, and supply is short of the demand area. And what the OEMs want to do, of course, is to catch up. And so they're expecting to provide a lot of work in 2022, and we should see that come through to us quite nicely. Turning to aerospace and defense. So this is 25% down year-on-year. Not unexpected. There's a slight improvement in aerospace and defense, and that is not really yet about plane build. It's new plane build and new engine building. That's mostly driven by flying hours producing demand for spares. And so we're yet to really see the impact of new engine build, which is where our major exposure is. And of course, it's now mostly on narrow-body engines. There is one green shoot that we've got there, though, that tells us that our assumption, which has been all along that we see the turn up coming in 2022. And that is that those parts of our business that are closest to the final assembly of the engines, such as Ellison, which is the acquisition, of course, that we bought at the beginning of last year, at the end of Q1, they're very close to the end of the production of the engines. And their business is actually up 9% in Q2. So that's good. And we're also seeing it in the piece that then is in our northeastern aerospace business, and that's starting to turn up, too. And once again, that's right at the end. And so there is a lot of inventory, though, in the supply chain. And as the engines start getting ramped up, what we will see is that inventory being burned off, and it will spread throughout the entire business. So overall, no meaningful upturn at the moment, but we are expecting, and indeed our customers are telling us, to be prepared for a very strong ramp in 2022, particularly on the narrow bodies, of course. Just turning our attention to the emerging markets. This is, of course, one of our key areas for strategic expansion. Very pleasing. We got a 36% emerging market growth, whereas in Western Europe, it's 16% growth in North American general industrial -- automotive and general industrial. And this business's energy market is primarily automotive, I'd like to point out. I'd already told you that there's not much difference between the territories in the general industrial growth, but in automotive, there is. And you're seeing that coming through in the emerging markets. Very good business. The other thing I think people should take note of here is the margins in our emerging markets are 25%. So we often have people say, well, it's great to grow in China, but the margins aren't so great. Well, that's not the case for Bodycote. In Bodycote, our Chinese margins are actually above 25%. It's a very good business for us. And we are keeping our expansion going in emerging markets, and there's a lot more to come there as we can get the capacity in place. And then Specialist Technologies, another main thrust for our strategy. Specialist Technologies contributing 43% of Group profit. And if we look at the two different pieces of Specialist Technologies, if I can call it that, there's the AGI-focused Specialist Technologies and the ADE-focused technologies. And you can see from the chart that the AGI-focused technologies, revenues are up 42% on 2020, and that's compared with a background 14% increase in Classical Heat Treatment in those AGI markets. Whereas ADE, where we've seen the aerospace weakness, the Specialist Technologies have declined 13%. But that is quite a lot better, of course, than the 23% drop that we've seen in the Classical Heat Treatment revenues for those market sectors. So, Specialist Technologies really pulling ahead. Great margins, great growth, great future. So if we look at then just as in summary terms at our business, looking at it through 3 different angles, one is the markets. And you can see on the left, the growth rates and the actual revenues of each of our markets there. And in the geographical splits. And then of course on the right-hand side, the technology splits. And you can see quite clearly from this, if you look at the growth versus 2020 down the bottom of the chart, emerging markets growing 36%, specialist technologies growing 17%. So, clearly leading the way, which is very nice with margins that are above the Group average. Just coming to strategic progress, then. Talked about the Specialist Technologies that continue to go at pace and there's good growth. And our emerging market strategy is doing really well. It's excellent. And we're well above 2019. We are increasing our focus on supporting production for electric vehicles in the emerging markets. And I'm happy to say that we've actually got a couple of greenfield projects at the moment that we're working with customers on to finalize that are specifically for electric markets. The civil aerospace narrow-body program continues to evolve. That is another part of our strategy. We used to invest much more widely in civil aerospace, but in recent years, we've focused on narrow bodies. And we anticipate strong growth in 2022 as that business starts to come up quite fast. Going back to the cost savings issue. So the restructuring program is doing well, but also we've got excellent efficiencies at the moment. Good cost management by the various teams around the world. So the business is really taking a turn into the higher quality end again, and we expect now the Group margins to be over 20%. I think this is the first time we've written it publicly, even though we've talked about it. And that's where they're trending to at the moment. And of course, that's unsurprising. You have Specialist Technologies margins that are around 30%. AGI margins now above 20%. And ADE margins always used to be in the low 20s, and we fully expect it to get back there as the revenues come back. So in summary, once again, profits up 35% on revenues up 5.9%. Restructuring going well. Just a quick mention. It's not part of restructuring, but it is part of the kind of work that's going on. The Ellison acquisition is being integrated very well and starting to hum, as it were, in line with the rest of the Bodycote business. Good production efficiencies with gearing of more than 70%. I think some people have looked at me in the past when I said we kept gearing above 70% with sort of strange looks at me. But here it is. This is what we do when things go well. Excellent cash generation. And we do expect growth to start accelerating once these short-term supply chain issues have been resolved and the aerospace business starts to ramp up. And faster growth, when it comes, will disproportionately benefit the bottom line. With that, we come to the outlook statement. This is the same as you've seen written in the press release. Just pointing out the obvious that we actually have upgraded our guidance here on the back of our first half results and what we anticipate for the second half. With that, we'll move to questions, please.

[Operator Instructions] Our first question comes from Michael Tyndall from HSBC.

Two or three, if I may. Can I start with specialist tech in auto seems to be very strong growth there. Certainly got you far above where the overall auto production is. Can we talk a little bit about what -- where you're being adopted in autos? What's it displacing? And is there a saving for the end customer by using the technology that they're using in specialist tech? Second question is just around the efficiency gains. You mentioned that you're going to hold them. How hard does that get in next year when you -- the growth comes through, as you were mentioning, both in auto and aero? And then the last one, a bit of a recurring theme for me. On the ESG side of things, you're putting together your science-based targets. So are most of your customers. Are we seeing any movement in terms of the trend towards outsourcing as ESG becomes very much front and center in the mindset of your customers?

Thanks, Mike. I'll take those. So the specialist technologies. Yes. So I think answering the second part of your question first, which was one of the customers get out of it. And they get a few things. The first thing that they get is that whilst the price, if you like, that they pay us is not any different from what they would pay for atmospheric carburizing, for example, or other substitutes that they would be using. So the immediate price of the work that we're doing doesn't change a whole deal. But what happens is because the processes actually produce cleaner parts, less distortion, they have less on costs. In other words, that further processing work that they might do in terms of straightening out components or cleaning them or whatever is reduced. And indeed, it allows them to design and build thinner parts anyway because of their lower distortion processes, and that saves the material costs. So they might not be paying us any less, but they certainly are having a lower cost solution and in fact a higher performance solution. And that's the main reason for adoption. They are going well. But this is the combination of a lot of work. It isn't just something that's happened by chance. And I think it's quite pleasing for our teams to see the results of this. Going on to the ESG side, I'll come back to efficiency. So it's quite interesting, because we didn't get much of an audience when we started talking to customers originally a few years ago about the environment. It was deaf ears. And then we started getting some interest in Europe. I think the piece that surprised me is that we've now got quite a positive take in North America, which really shocked me, in fact, because there didn't seem to be any attitude towards it. But now we are, quite recently, with customers talking about carbon reduction, and quite surprised to see how much carbon can be reduced and what it does for them. Because a lot of these guys, of course, if they've got a captive heat treat, it's probably their biggest energy use by far. So tackling that is a big one for them. And there are some interesting conversations going on there with some very large customers. But I wouldn't say it's that widespread. It tends to be the larger customers that want the conversation. The smaller ones aren't there yet. And if you're talking to the engineers, in particular, or the buyers, they're definitely not there. So it's the bigger customers driving that attitude. And I fully expect this to increase the rate of outsourcing, which I think, as you may know, outsourcing generally is a slow trickle and has been for many years. It's still going that way. But I expect it to increase as the years go by here. And last, efficiency gains. How hard are they to hold? It really starts happening when you reach the point where you have to put on an extra shift or you have to put in more equipment, then you find your efficiency falls back a bit because you end up with underutilized resources at the early stage. Now we have a lot of capacity, at least in the developed markets, so I think that particular piece is some way away. But what we will start seeing is more shifts coming on as the plants in the developer side of the business take more business with growth. I would expect to hold our efficiencies at the very least through into next year, and then we will see. But I don't think you can achieve gearing -- operational gearing of over 70% all the time. It's going to come down to a more natural 50%, as we go in time. I hope that long answer answers what you were after.

No, that was perfect.

Our next question comes from Maggie Schooley from Stifel.

This is just a little bit more of a longer-term question. I think it's very interesting what you were talking about in terms of your movement in ESG and electrification and how that plays into your specialist technologies. But as you push these technologies and clients gravitate to them, can you give us an understanding of the changing shape of your business over the next couple years? What I'm trying to get a feel for is, for instance, could you see the operating profit split from classic heat treatment to specialist technologies could flip flop?

Yes. Obviously, these things are always a split in terms of how the different parts of the business perform. And clearly, we still expect the classical heat treatment side of our business to perform well. And as we've seen in the first half of this year, it has performed well, particularly on the AGI side, and grown margins significantly. But I think more generally, it is absolutely part of our strategy to see that Specialist Technologies revenues will outperform the Classical Heat Treatment revenues. They are at a higher margin. And naturally, therefore, over time, all things being equal, acquisitions aside, et cetera, we should see Specialist Technologies as a percentage of the revenue and of profits rise over time.

Makes sense. And then when you think about securing more renewable technologies, have you had any traction with securing PPEs? Because those are -- with the renewable providers for where you need it, because these are actually quite sought after, and from what I understand, quite difficult to negotiate. Are you just starting that process, or is that something that --

You didn't come through very clearly there, mate. Could you just say that again, please?

Sorry. I was just thinking also in securing a more green mix of your electricity, have you had the opportunity to have a lot of negotiations on PPE agreements to secure renewable electricity where applicable? Or is that still very much in the early processes?

Yes. Well, I think the short answer to that is no, we haven't. We have a lot of green energy in places like Scandinavia where it comes from hydro and in France where it comes from nuclear. But in terms of actually getting agreements from suppliers to just have a portion of green energy from them, early days yet. We're not at that.

Our next question comes from Jonathan Hurn from Barclays.

Just a few questions for me, please. Firstly, can I just talk about labor? I think if we go back to Q1, you said you were seeing some labor shortages. Has that continued through Q2? If so, which plants are really being affected by that? And do you think that can unwind in the second half and maybe start to see some pull-through of essentially a backlog, which probably built up from the reduced labor? That was the first one.

Okay. Well, let's take one at a time. And so the labor shortages we've seen were primarily in North America in very specific states, actually. And they are alleviating a little bit partly because we've taken a different approach to recruiting. But there's still -- the labor market there is very tight. And that's interesting for the future because it's not that our labor force is inflation at the moment there, because the vast majority of our folks have an annual pay increase, which we're well away from at this point in time. But we are seeing an intake of folks that we're having to attract with slightly higher pay. And that's getting us to the sort of forewarning of inflation, which is what Dominique referred to earlier. And that, of course, will come through, and then as we start pushing our price increases to different customers. So that's where the main issue is. There's also some areas, for example, in Eastern Europe where there's some labor shortages, and they are fairly immediate. We can solve them, but we end up bringing in folks from further afield. So it's not cataclysmic by any means. I know a lot of companies that are in much worse shape than us. But it definitely is there.

Great. That's very helpful. Second question is just on Ellison. Obviously, where it sits in the cycle, it's quite early cycle. You said the performance is getting better in Q2. Can you just sort of give us a feel for where profitability of that business sits right now and how we think about that profitability developing sort of second half and into 2022 as well, please?

Well, as you can see from the headline operating profit bridge, it is not contributing in a very significant way to Group profit, but it is nonetheless doing better than it was a year ago. I think the key point that we're trying to get across there really is that from an operational efficiency perspective, it has improved significantly. All things being equal, given the revenue decline, it suffered. One would have expected it to be making losses and it's making profits. And as the revenue comes back, we fully expect the gearing in that business to be very good, and therefore, the profitability and margins to improve to -- well, the margins to improve beyond the levels that were in our base case assumption when we bought the business. There was always potentially some operational efficiency upside, but we didn't build that into the original model. We think we're achieving that already. We just need the revenue to come back to drop through to the bottom line.

And that business should get up to Specialist Technologies margins in due course.

Great. And then just the final question, maybe just sort of a little bit of a longer-dated question. Obviously, if we look to 2022, obviously you're saying that aerospace will recover. We'll start to see auto volumes bounce back. You've got another GBP 10 million of cost savings coming through in 2022. Does that -- is that year the year that we potentially could hit that 20% margin target that you referred to earlier? Do you think it's 2022 as a possibility for that?

I'd like it to, but I'm not going to forecast it, that's for sure. But it's something I've been working on for a long time. But we'll see. We'll see. No promises, but we'll see.

Our next question comes from Andrew Douglas from Jefferies.

Most of my questions have been answered, however, I've got one on emerging markets. Are you able to paint a picture for us of emerging markets growth over the next kind of couple of years? And I appreciate it's going to be market led. But in terms of things that you can influence, maybe give us a feel for how many new sites you can add every year for the next, I don't know, 3 to 5 years. You talked previously about China and maybe buying some land strategically. Is that still an opportunity? Is there anything you can do to push forward the emerging market story, given the growth and the margins? And then secondly, just on M&A. Just thoughts on the M&A opportunities as we kind of sit here today. Clearly, the balance sheet's in good nick. Just wondering kind of thoughts there, please.

Emerging markets growth. So I think one thing to remember about our emerging markets. These plants typically are ones that are more modern than our other facilities, and they're large. So there tends to be a lot of floor space, particularly as land in the emerging markets is a lot cheaper than it is in the developed markets, and so we've built large facilities there. So the initial part of the growth is actually filling out the space in the existing plants. I know we've got in Mexico at the moment one of our newer plants there. We're just about to fit out another hall, effectively doubling the used space in that facility. And that's the kind of thing that we're pushing forward on. It's relatively straightforward to put greenfields down in most of the emerging markets. As yet, there's nothing to buy. So we're pushing ahead, for example, in Hungary. We're looking at another plant in Hungary. It's all very straightforward. It's really getting the negotiations with the customers sorted, because when we build a greenfield, we don't do it on spec as it were. What we do is get an agreement with an anchor tenant, an anchor customer as we call it, that underwrites the initial investment. And then we can add to it as the business gets starting up. But basically, Eastern Europe, no problem in terms of new greenfields. Mexico, no problem in terms of greenfields. And indeed, we have space in the plants that we've got to expand. So that comes to China. The Chinese facilities do have some capacity in terms of floor space, and we are filling that out as fast as we can. That is held back, as I said, people constraint in terms of project resources. But we're going pretty fast there. And we are looking at the moment another greenfield in China. And I have to say, it appears as if the real estate situation is starting to ease a little bit. Maybe we're just getting a bit smarter about how to do it, but it is easing a bit. And some of the municipalities are now fighting to be able to give us capacity, whereas when there was massive growth in China in these areas, they really didn't want to talk to us. Now they do. So there is some capability there. And we are still looking at our acquisition strategy to get sites as opposed to businesses. So I would expect, talking in terms of new sites going down is less helpful, but because we will be expanding in our existing as well. So the kind of growth rates we're seeing at the moment, I don't see a problem with keeping that up for a few years in terms of capacity.

M&A.

M&A. A perennial question, M&A. There have been quite a few PE assets that have been chased around the place. Some of them a lot more moth-eaten than you would expect. But we haven't bitten on any of them yet. We continue to look. We're always open. But nothing that particularly sort of gets your juices flowing yet.

Is it fair to say -- just a follow-up there. Is it fair to say that the quality of the asset is better than it was maybe 12, 18, 24 months ago, or is that not fair?

No, it's not better. It's worse.

Worse. Okay.

The stuff that we're looking at now, they haven't actually done a great job with them, frankly..

Our next question comes from Celine Fornaro from UBS.

My first one would be regarding the comment you made on the aerospace and actually providing some color on the mix of the business. So saying that aftermarket, you think is recovery or that is what is driving your recovery compared to OE. And I think in the past, you've generally said that it's very hard for Bodycote to differentiate where the part goes. So how come I would say in this instance you're able to see that? And also, is this mainly driven by narrow bodies, or you also have a pickup in wide bodies? And then my second question would be on the summer shutdowns and particularly on the, I would say, automotive sector, and should we expect them to be a bit longer than usual because of the supply chain constraints or not?

So if we just address your questions in aero, good question. So the split of the business works like this. The narrow-body engines come out of General Electric and Pratt & Whitney. And typically, General Electric does a much higher percentage of repair work in the aftermarket than new parts. We don't have a huge exposure to Pratt & Whitney. So GE has a much larger percentage of repairs. We don't participate in the repair market. What we do is to process components that are new components that could go into a new engine or into a serviced engine. And so there you can look at Rolls-Royce. And Rolls-Royce have had a new for old policy for a long time. They don't do repairs to speak of on blades and the like. What they do is that they replace the parts with new parts. And as they control the power by the hour mechanism where they're controlling the service records of these engines, they are driving that. So where we can see it is we know the engine build rates out of Rolls-Royce, which are not really going anywhere at the moment, but we can see that their business is going up. And so we conclude from that, that that's driven by flying hours. And in fact, that's backed up by anecdotal evidence around the place as well. So that's one piece. There is also some work. And you can tell not by the split, but the type of component being produced. If it's a wear component and that's going up, and the non-wear components are not going up, then you can conclude from that again that that's probably the aftermarket. And so that's how we look at it. That's why we know aftermarket is growing -- is what's growing at the moment. And we also talk. We have schedules out of these -- or schedules, I should say, in the U.K. as of these OEs that tell us what their rate of build is going to be so that we get a good future view from them. Best insight we get actually in any of our businesses. And so the amount of engine build is not occurring right now. So once again, it's from the aftermarket. But for us, of course, it doesn't matter from a profitability standpoint. The price of a new component versus an aftermarket component from us is identical. I hope that answers the question on the aero side. If it doesn't, let me know.

I'm sorry. Yes, it does. Just to clarify, so you think the pickup at the moment for you is more on the wide body, given all this aftermarket detail exposure that you gave, right?

It is a little bit more on the wide body. It's -- saying wide body, it's on Rolls-Royce a little more than the others in terms of percentage. Okay?

Thank you.

It's not a huge difference. Then on the summer shutdowns, I don't really know the answer to that question. What I do know is that some plants are closed at the moment because of supply chain issues and aren't expected to open until the end of September. But that's not really a summer shut. It's just that they've reduced capacity because they don't have the raw materials and the components to build. But I can't tell you whether the summer shuts will be longer than usual. I haven't had that information. Normally that kind of thing happens at the last minute anyway. But right now, not getting that kind of feedback.

Our next question comes from Christian Hinderaker from Liberum.

I have two. Firstly, your bridge on Slide 8, you had GBP 1 million of net pricing. Just interested in your view on how you expect to hold or perhaps improve on that in periods ahead, given the likely phasing of price discussions? And then secondly on incremental margins, clearly the 70% is very solid and perhaps driven by AGI. I know historically, you've talked about 50% being your incremental. I just wonder whether you see any shift in the balance here between the two businesses, given the sort of distribution of your restructuring efforts going forward versus that sort of 50% historic guidance.

Okay. On the pricing, we're not, in many parts of our business, trying to move our pricing ahead of our cost inflation. All we're trying to do is to recover our cost inflation. To the extent that we have prices at very low margins on certain products, yes, we will try and move pricing up ahead of the cost inflation, but that's really just to return it to a more sensible margin. But generally, we're just trying to recover cost inflation through price increases. If -- and then I think you're asking about how do we expect to continue to be able to achieve this. If you look back in the last 10 years or 10 years plus, half in, half out, we achieved this. And right now, actually, it's relatively -- it's not easy, because no pricing discussion with a customer is easy, but our customers are experiencing significant raw material price inflation. Mainly in our business, we don't have raw material price inflation. Our key input costs are energy, some industrial gases, but mainly labor. And you're not seeing the same percentage increases in those labor costs that many customers are experiencing on lots of their raw materials. So I'm not suggesting that the discussion will be an easy one, but in the context of inflation that many of our customers are experiencing, what we will be looking to get is actually relatively lower than they will be experiencing from others. In terms of the 70% gearing, operational gearing, we have -- what we did last year is we took out a load of cost. And in parts of the business, we have seen revenue recovery against those trucks. And what we've tried to do is to hold onto that, those cost savings and be quite miserly about adding cost back into the business as the revenue recovers. So inevitably, to your question, we've seen that more in AGI so far than ADE because AGI's revenues have recovered, whereas AGI's -- sorry, ADE's have not recovered significantly. As ADE's revenues recover, we would expect to see a similar phenomenon in ADE. But as Stephen has already highlighted, we can't extrapolate forward that level of operational gearing beyond a certain point. We'll achieve the efficiency gains, but as soon as we start to having to add pieces of kit or labor shifts, et cetera, then you revert to a more traditional gearing number of around about 50%. So I don't think you can extrapolate that 70% forward too far into the future.

Our next question comes from Robert Davies from Morgan Stanley.

My first one was just around your cost base with your employees. Just the question I had was you've been reducing the number of sites over the last few years and sort of flexing your sort of, I guess, variable employee headcount numbers. Is there any opportunity to actually sort of physically scale up the size of the sort of furnaces or kilns that are doing the heat treating process to have effectively less people running bigger individual operational sites? Is that at all a possibility? Or is that sort of not technically feasible or not economically sensible thing to do? And just wondered if you sort of reduce your number of sites, if there's any opportunity to sort of scale them up and reduce headcount numbers, given that's your biggest cost base.

Yes, I don't think so for two reasons. First of all, the furnaces, there's an optimal size of furnaces, depending on the customer mix. If you put in too big a furnace, you end up running with low utilization rates, and that's too costly. If you put in too small a furnace, then you might run at very high utilizations, but actually running a smaller furnace is more costly than running a bigger furnace that's fully utilized. And that's a competitive game. So if you're competing with somebody who's got a bigger furnace and therefore utilized, they will be able to underprice you. Not that you get a lot of customers switching between companies. What happens is that when you go for new work, they might underprice you. But it's not a huge phenomenon. What we do anyway is we size furnaces to be optimum for the market that exists. And we're continually finding situations where we have the wrong furnace size there. So we might have a small one, and we'll swap it out and put in a larger one and move that small one somewhere else. And it's not just because of the volume of the business; it's the type of work. You might get small customers doing a highly repetitive work or very frequent work, and the best solution for them is a small furnace that you can fuel quickly and deliver back quickly and then they're coming with another order. And often, you're mixing a lot of different customers together in the furnaces. So long answer, but furnace scale is driven by other things. In terms of sites, you could put more equipment on a site. And that has been a temptation in the past. What we find is the large sites typically get more complicated and you end up having to have three PhDs to run them. And you lose all kind of benefits in terms of simplicity, and you get the cost of complexity comes in. And so there's a natural limit for that. It's easier if it's a uniform set of processes. So these days, we try and keep similar processes in the same facility so that it doesn't become highly complex. And if we can do that, then certainly the bigger the better. And that's one of the things that you're seeing potentially in these emerging markets where we have big sites to start with. You're always combating the situation where distance is the enemy. It's not about cost. It's about turn time. In other words, the customers don't want to have the cash lockup in their components because they've got all the material costs involved. So they want it back in-house as soon as they can so they can get on and produce the goods. Otherwise, they've got an inventory lockup in the shipping times. So distance is always an issue, and that's a natural limitation on the scale. So bottom line, more equipment in existing sites, but not larger furnaces would be the game, if you've got space.

Okay. Thank you. And then my second question was just I was looking at your charts on -- I think it was a quarterly revenue progression by end market. And just on the general industrial one, I know that it's a disparate mix of -- it's different markets in there. But can you give any color on sort of what's driven that recovery? Apologies; I missed the beginning of the call. You may have covered this already. But just that sort of jumped out when I saw it sort of having connected the peak of 2019. Just wondered where the strength within the general industrial business particularly was coming from.

So it's certainly not coming from any particular geography in GI. It's broad-based. In terms of which subsectors it's coming from, it's not coming from tooling. I did cover that in the presentation. Tooling's kind of gone flat. But across the other areas, we've got some pickup in medical, for example. There is -- which is something that we said we would be pushing anyway. But it's quite broad-based. No big highlights. There's a little bit of restocking going on, but not anywhere near as much as some of our customers say they would like to do.

Okay. Thank you. And then my final one was just on the Specialist Technologies. I know that encompasses a number of different technologies. I guess it's somewhere between sort 8 and 12, depending on sort of which ones you've been focusing on. I just wondered particularly within that group of technologies, is there one doing much better or worse than you'd sort of expected versus a couple of years ago? I know a couple of them have got disproportionately hit because they were sort of more aerospace linked, but would just be kind of interested in some granularity around the different parts of Specialist Technologies, if possible.

Yes, we don't like giving too much granularity because it's competitive information, to be honest with you. I can say probably strongest area is in the stainless steel area. Low pressure carburizing, LPC, that's due a bit of a fill-up. It's been a little quiet for the last year or so. A lot of that's got to do with where auto production was and the transition to EVs. So LPC has been a little bit slower than we might have liked, but I think that's going to become quite strongly. And stainless steel has been doing very well, but it's always been doing very well. It's one of those businesses that it's sort of like you build the plant and the customers turn up the next day. It's a very good business. I'm overstating the simplicity there because it actually takes about 1.5 years to get a customer persuaded to switch when they've seen the technology. But the growth rates are impressive.

And Robert, we did say on the Specialist Technologies chart, I'm not quite sure when you joined, that the AGI-focused Specialist Technologies has grown 42%, whereas the ADE-focused Specialist Technologies declined 13%. Both well ahead, again, of their background markets, but that's some level of granularity.

That's helpful.

Are you happy to take another question?

Sure.

Our final question comes from Harry Philips from Peel Hunt.

Just to be very quick and brief. In terms of the M&A, I know you answered Andy's question, Stephen. But I'm imagining that, as you said, the PE assets rather than the family assets, which probably recovering really well in this environment. And as you say, there's not much sort of corn in the ground in that PE context. The other one was just around CapEx and growth CapEx. If you highlighted it, Dominique, I missed it. But could you just give us some thoughts on where those might be in the current year and where that growth CapEx particularly goes in 2022 and beyond?

Yes. I'll do the M&A one, just a little bit more color there. It is PE based. I wouldn't jump to conclusion that the family owned guys are doing great either. Some of them are in a lot of trouble. I know 1 or 2 that are really sort of near death's door. But death's door for these businesses is one of what they do is that they basically sell the assets to liquidate the business and somebody else is back in there straight away, so they don't disappear as a competitor. But the ones that are on the market are PE, for sure. There are some assets that are owned by larger companies. They're kind of holding on. There's very few of them, but they're holding on. They're hoping that they're going to get further into the recovery, particularly if they've got the aerospace exposure, and so they're not coming up at this point. But a whole bunch of smaller assets that are PE, and not necessarily in Classical Heat Treatment, but in adjacencies with Specialist Technologies. I'll hand it over to Dominique.

So on expense of CapEx, we spent GBP 10 million in the first half. And I would expect that we'll spend somewhere between GBP 20 million and GBP 30 million for the full year. So more than GBP 10 million in the second half. But it's quite difficult to predict exactly how much that's going to be because it depends on the pace of some of the projects that we've got. And as Stephen's highlighted, when we're looking to add new facilities and buy new land, those are binary cases. Looking a bit further forward, the numbers will be higher. And I'm not sure I can be more helpful than that. If you go back over the last few years, we've spent anywhere between GBP 30 million and GBP 50 million on expansionary CapEx. Obviously, I'd prefer to be at the top end of that range because that means we're finding lots of interesting new projects that are going to drive our top line and profit and margin. But it really depends on the pace of finding those projects and the ability to deploy the capital there.

We have no further questions, so I'll hand it back to you, Stephen.

Well, just to say thank you very much, everybody. Thanks for taking the time to talk to us. And hopefully talk to you soon. Thank you.