Bodycote plc (BOY) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Bodycote plc 2022 Interim 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, Bodycote Group Chief Executive, to begin. Stephen, please go ahead when you're ready.

Thank you. Good morning, everybody. This is Stephen Harris, Chief Executive of Bodycote. I am here this morning with Dominique Yates, our Chief Financial Officer. I hope everybody is doing well on this bright and sunny morning. And let's move into the meeting this morning. So if we look at the agenda, I will give you a quick introduction and overview and then hand over to Dominique, who will take you through the financial review. And he'll then hand it back to me and I'll take you through the business on through to the outlook. So moving straight into our key achievements in this first half. And I -- obviously, we're going to go through each of these points in some detail later on in the presentation. The first thing is that it's clear that we've had some excellent pricing and surcharge execution. And the cost inflation is now being fully recovered by the end of the half. We had a lag in getting this stuff into place because you do have to give customers some notice that you're putting this system of surcharging in place and, of course, price increases require some notice. But that's all going very, very well. The volatility that we were talking about on our last update to you where we're seeing really extreme case of daily volatility in demand, which leads to lower efficiency in the plants. Glad to say that we've managed that quite well, and that demand volatility is now stabilizing and reducing quite a lot. A nice step forward on our ESG front. We have actually submitted our science-based targets, and we're committing to a 28% reduction in absolute emissions by 2030, and for Bodycote emissions is entirely in carbon, nothing else. And then moving on to the growth. I mean, we did have a decline in revenues even after our price increases in Automotive. But notwithstanding that, we've got Civil Aerospace up 30%, General Industrial revenue is up 19% and Emerging Markets up 22%. And then the other thing, I think it's worth noting, just at this point before we move any further, is that whilst there's a lot of information about looming clouds of recession, we're not seeing any reductions in demand with our direct customers or in our business. Looking at the financial highlights. We've got revenues up 14.6%, and of that, nearly 10% of that revenue growth is down to our pricing and surcharges where we're recovering inflation. Headline operating profit up 60 -- up 6%. Net debt at GBP 57 million. And to note that we've got a very good strong balance sheet and it gives us some optionality moving forward. We're declaring an interim dividend of 6.5p -- 6.4p. And our full year expectations are unchanged compared with our last statement that we made. Handing now over to Dominique Yates.

Thank you, Stephen, and good morning, ladies and gentlemen. So Chart 7 provides a summary of the group's financial results. Now most of these items are covered on other slides so I'm not going to repeat the comments there. Just draw attention to the 3% increase in earnings per share, and as a result of that, or accordingly, the Board has declared an increase in the interim dividend from 6.2 to 6.4p, as Stephen just indicated. And that will be paid out at the beginning of November. On to Chart 8. And this is a first for us, really, in light of the unprecedented contribution to revenues from price increases and surcharges. You already heard from Stephen, you can see here that price increases drove almost 10% of the revenue growth. It's worth adding that the impact of surcharges varies very widely between countries because the energy cost inflation has varied widely between different countries and also between electricity and natural gas. It's also worth highlighting that the Q2 impact was greater than Q1 as the surcharges were being implemented through the first half and also the energy costs in Q2 were higher than they were in Q1. These surcharges will vary up and down going forward as energy costs move. Chart 9 shows the operating profit bridge. The significant and precipitant increase in energy costs experienced at the back end of last year, then further fueled by the Russian invasion of Ukraine, led, as previously announced, to a negative lag impact on the P&L as we need to give notice to our customers of the implementation of surcharges. So this cost us approximately GBP 5 million hit to profits in the first half. But by the end of the half, the implemented surcharges were covering the experienced cost inflation. So barring any very significant increases, further increases in energy costs in the second half, there won't be any negative impact on the P&L from energy cost inflation in the second half. The unprecedented daily demand volatility that we saw during April and May, and we talked about in our May trading update, that had an impact on efficiency and exacerbated by the impact of lockdowns in China. We estimate that this cost us at least GBP 2 million in terms of P&L impact in the first half. Daily demand has since been stabilizing to more manageable levels. On the plus side, we're delivering the full GBP 30 million of annualized cost savings from the 2020 restructuring program. And in terms of incremental value in the first half against last year, that's a further GBP 5 million of cost savings delivered in the first half of last year compared with 2021. And we also had decent drop-through on the organic volume growth, the GBP 4.2 million that you see on this chart. So putting all of these elements together, we had a 6% increase in constant currency headline operating profit, as Stephen has already described. Chart 10 shows the division -- moving on to the divisional results, and Chart 10 shows the AGI result. There's a clear divisional results within this part of the business with our Automotive plants experiencing volume declines and the bulk of the impact of the daily demand volatility that we talked about, whereas our General Industrial plants showed good volume growth. I should also point out that the AGI business experienced a greater level of cost inflation, and that's really to do with the geographical mix and where our AGI business is and where we saw the greatest impact from energy cost inflation. And it also means that most of the lag impact described earlier was in the AGI division. So as a result of that, AGI profits actually fell 6% at constant currency rates. It's worth mentioning, though, in spite of the lower volumes here that you can see on the left-hand side on the revenue chart and the lag effect and the efficiency impacts that I've already described, operating profit in the AGI division is still ahead of where it was in the first half of 2019. So this really demonstrates the positive impact of the management actions that we've taken over the last couple of years. Chart 11 shows the ADE result. Probably less to say here. We had higher volumes and showed strong profit growth and, consequently, margins rose in spite of the dilutive impact on margins from the price increases that we put through to cover the cost inflation. Chart 12 shows the cash flow performance. Key variances versus last year related, as you can see, to -- mainly to working capital and maintenance CapEx. On working capital, the significant price increases resulted in higher levels of trade receivables. We typically have 2 months or so worth of revenues outstanding. Moreover, in the comparable period in 2021, there was 0 bonus payment, whereas we did pay a bonus in the first half of this year. So that also has an impact with a working capital outflow this year and actually an equivalent working capital inflow in the corresponding period in 2021. Maintenance CapEx has now also returned to more normal levels following the reduced activity levels during the pandemic period. And also worth highlighting that, all things being equal, cash flow is weighted towards the second half with lower trade receivables in December compared with June and no bonus paid in the second half of the year. Chart 13 looks at the balance sheet. Net debt is at GBP 57 million, a very comfortable financial gearing level of 0.4x, and we have almost GBP 200 million of financial liquidity. And during the first half, we also extended our credit facility a further year with it now maturing in May 2027. Headline tax rate, 22.2%, in line with guidance. And based on the latest exchange rates, we will experience a ForEx tailwind in the second half, which will offset the slight headwinds that we experienced in the first half. So now back to Stephen.

Thank you, Dominique. So if we move to Chart 15 straight into our ESG strategy. On the graphic on the right, we've got some selected highlights of our various ESG elements. But the majority of this slide is concentrating on the carbon reduction story that we've got. And unlike many others, we see ESG actually as a catalyst for growth at Bodycote. We have submitted our targets now, so 28% reduction in carbon by 2030. And we've got quite a number of projects underway, and we continue to move into lower carbon processes as we invest going forward. But I think a key point of this is it's not just about our own carbon reduction, it's about helping our customers. And the mere fact that we aggregate from different customers allows us to run at much higher fill rates than they can on their own. That makes it inherently more efficient. We also operate the efficient processes ourselves. And we can process components with as much as a 60% less carbon than they can do themselves, which is a very good incentive for companies that are trying to reduce their Scope 1 and Scope 2 emissions. I mean, first of all, when they give it to us, it becomes a Scope 3, which a lot of people spend less time looking at. But more importantly, even when they do give it to us, the Scope 3 that they would record would be significantly less in most cases than their Scope 1 or 2 that they were doing previously. So generally speaking, it's a pretty good approach here that should help drive our growth. We are taking advantage of green energy where available. Unfortunately, in most places, it's not available at this point in time. And then we are -- even within this, we're converting customers who are currently using with us gas field processes and helping them move over to the electrically powered processes, where we can get the advantage of green energy where it exists. And it's generally a lower carbon footprint for those processes anyway. And that's a nice segue into Chart 16, which is the topic of energy security, very much on people's minds at the moment in Europe with the gas situation. It all is not as it might first appear to people, though. And ironically, it looks like we might, in fact, be quite well positioned in this situation. I mean, first of all, we've been moving away from natural gas now for quite some time, and 3/4 of our profits in Bodycote are generated from electrically powered processes. But that's not the whole story. Most of the energy shortage appears it's going to be -- the gas shortage would be in Germany, where we have quite a low market share. And what we are looking at with customers is they're moving their production to those suppliers that are in more energy-secure territories. For example, in Scandinavia, 100% of our energy comes from electricity. In France, it's 97%. And so where they have an existing supply chain they are looking to potentially move to other countries that they can have better energy security with. And if they do that, because our market shares in the other countries in Europe are significantly higher than they are in Germany, ironically, we may actually get a bit of a tailwind if there is more energy rationing on gas. And the other thing to note is that in the long term, higher energy prices are good for business because it makes people pay attention to the thermal processing and then look at moving it out because it is quite a financial burden for them. So with that, moving on to our sector analysis, starting with Automotive on Slide 17. So a decline in Automotive of 4%, and that's even after the price rises that we put through. So in volume terms, quite a significant decline in Automotive, not unexpected by anybody, I don't think. They were -- Automotive was hampered quite a lot by supply chain issues, and it was further exacerbated by the COVID-19 shutdowns in China. The situation now appears to be easing. Certainly, the daily demand volatility which we were seeing which was predominantly in Automotive has dramatically reduced actually. And there's still significant pent-up demand for new vehicles, as anybody who's tried to buy a car recently will know that lead times are very long. Secondhand car prices are still very high. And if we look at IHS, they are forecasting sequential vehicle production in Europe and North America to grow in the high single digits in half 2 with 2023 growing in double digits. Now you can put more or less importance on IHS' forecast. What I will say is that a number of customers are actually saying similar things. Our favorite, General Motors, in North America are claiming to have 20% growth in the second half compared with the first half. So Automotive does appear to be turning, which is good. Moving on to the General Industrial area. And for the first time, we're actually breaking down in that pie chart on the right, Chart 18, the various elements that we look at to make up General Industrial. And I think the important part about this chart is that the items in blue as opposed to gray, so Industrial Machinery, Construction and Agriculture, for us, are predominantly capital expenditure-driven sectors for us. So I think we've had very -- well, we've had strong growth in those areas. And I think that actually points to what we've been saying now for quite a few months, is that we are in a CapEx expansion cycle, which doesn't change very quickly. In fact, General Industrial as a whole changes very slowly. And in particular, the capital-driven parts of the business, they change quite slowly. Overall, 19% growth in General Industrial. The growth is very broad-based right across the world where we operate, nothing -- any specific territory, but really quite strong. And the other takeaway from this part of the business is that Tooling, which I talked about before, as being a lead indicator for Automotive. And you remember that at the end of last year, Tooling was going down, we are now seeing in the first half of this year, Tooling going up. And that should spell corroboration for the idea that Automotive is going to strengthen. Moving on to Chart 19 for Aerospace and Defence. Good growth here, 20%. And that's sort of coming from a number of areas. One is strong new aircraft production. I mean, if you look at the numbers come out of Airbus recently, they did 640 new A320s in 2019. They expect to sell now 700 in 2022, and they're ramping their production to 900 units in 2025. The Farnborough Airshow and actually from the forecast we received from the engine builders, which is the GE, Rolls-Royce and Pratt & Whitney, our customers, it's quite interesting. I mean, we've seen a slight dent in Q3 from GE, not going down but not as high as they had previously estimated, but a strong growth back in Q4. So still continuing growth at nice levels in the engine side, which is the largest part of Aerospace and Defence for us. And the Rolls-Royce wide-body side of thing, this is driven a lot by their power by the hour -- how much air miles are going on, air flight hours. And one of the main drivers of that is global air freight. And that's well above pre-COVID levels now, and it's growing consistently. In addition, we've got short-haul passenger air travel returning very strongly. Anybody who's tried to do a short-haul fight recently can probably testify to that. And in the U.S. and Europe, we see passenger numbers now close to prepandemic levels. Interestingly, Defence revenues are flat, and we've seen some growth there from some consumables, like missile casings. But none of the CapEx projects have actually hit us yet, although we are expecting that, and we expect to see that in 2023. It does take time for people to ramp up. And so 2023 should see some pickup in Defence. Moving on then to -- and just a different cut of the business, Emerging Markets. And we can see quite strong growth of 22%. But Emerging Markets is where we've seen the most energy inflation. In fact, in some areas, we have a 600% increase in gas prices. That was 600%. We've passed through the price increases very consistently and very well. But that actually is the majority, nearly all of the growth in Emerging Markets is coming from the energy surcharges. And one of the reasons for that, of course, is we had China shut down for a month from COVID. Now in China, we still have plants that are under restrictions, they're called closed-loop restrictions, where our employees are actually living in the plant, so they sleep there as well as work there. But interestingly enough, it doesn't appear to affect the transportation of goods to and from the facilities. So that situation should ease a bit. And then we also have netted Automotive, and Automotive is about 60% of Emerging Markets. And that, of course, was a negative in the first half. Countering all those issues was at the General Industrial volume growth which was very good. So overall, you've got 22% with some slight growth after you take away the price inflation. Then just taking a look at Specialist Technologies. So here, we've got growth of 10%. It's a little bit misleading, which I'll explain in a minute. The reason why it's a bit misleading is 2 factors. One is that the energy surcharge impact in this area is very much smaller. First of all, we don't have this Specialist Technologies much in the Emerging Markets. But most importantly, they're lower energy technologies in the first place. So the energy surcharges are considerably lower. And we also have a predominance of our long-term agreements are in Specialist Technologies. Remember that the primary reason why customers want a long-term agreement in Specialist Technologies is because they want to control our ability to increase prices, which is the reason why we don't necessarily like long term agreements, strangely enough. And it's meant that we haven't seen price increases from those LTAs in the first half this year. We will start seeing them in the back end of this year, but mostly it will be into next year. And that has also reduced the amount of pass-through on pricing that we can do. If you actually strip back the numbers, you find that Specialist Technologies has got a 6% growth ahead of ADE Classical Heat Treatment and 4% growth ahead of AGI Classical Heat Treatment. So this is quite a skew in terms of the pricing impact between Specialist Technologies and Classical Heat Treatment. In summary then, headline operating profit is up 6%. I think we're managing inflation particularly well. If we get more, particularly on energy, there will be surcharges coming through again. But now that we've announced these to the customers and the structures of how we're doing it, there's a notable sea change in the general industry, by the way, where people are very much more accommodating for surcharges. And having led the pack, we see a lot of other companies in thermal processing now doing the same thing. So we don't see a huge resistance to surcharges going forward, which will pretty much eliminate a lot of the lag. There'll still be a little bit of lag associated with the LTAs, but we won't see the kind of lags that we saw in the first half. If you look at the automotive market, we talked about supply chain issues, it reduced revenues by 4%. But looking forward, we're expecting improvement in this area, particularly in North America. And in other market areas, we have seen a strong growth. So Aerospace up 30%; GI, up 19%; and Emerging Markets, up 2%. And to reiterate the point, we have not seen any indications of a reduction in demand. That brings us on to the outlook. It's up there on the slide, on Slide 23. I don't intend to read it out. It's a straight copy from what's in the press release. I think the only thing that I would emphasize is that as we stand here today, we don't see any change in our expectations looking forward for the full year. With that, we'll move to questions and answers, if we could, please.

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

A couple of questions from me, if I may. Just the first one, and I guess the best way to phrase it is around flexibility, thinking about the potential for gas rationing. I take your point in terms of your exposures. But what capacity do you have if manufacturers decide to basically squeeze 5 days production into 3? Can you deal with that kind of surged production? And then equally, how much flexibility do you have if it does turn out that we're seeing lower activity in terms of can you wind operations back quickly? The second question is around decarbonization, submission of the targets. Is that part of the calling card to compel people to outsource? Where are we in terms of the momentum in that regard? Because I understand there's a big opportunity there, but it seems to take some time to get people to kind of cross that line as it were.

Thanks, Mike. Yes. Okay. Surged production, it's a good question. So if companies do, in fact, stay where they are but just reduce their production to 3 days out of 5 or 3 days out of 7, do we have spare capacity. And unfortunately, yes. I'd say unfortunately in some respects because we like to be fuller. We are still at fairly low rates of utilization. And undoubtedly, in some places, there will not be the capacity there at the moment. But that's more of a shift capacity issue rather than physical equipment capacity. So we may have to take on an extra shift but have only 3 days, which is funny were doing it. So we might have 5 days at the moment where we're on 3 shifts. But if we went down to 3 days, we just have to put on another shift at night. So yes, we've got plenty of surge capacity. Can we wind down? Yes, I think we're quite flexible. We still have -- what we heard back, a bunch of temporaries. We still have that situation. We would be into furloughing. It depends where it is. It's mostly temporaries in Western Europe. And in the rest of the world, we can pretty much furlough them straight away. So yes, good flexibility. And as long as we don't get a precipitous demand decline, any reasonable kind of decline if it came or any situation where we had to kind of reduce production because of energy surcharges, I think we're well placed to look at that. As far as the ESG question and our ability to use that as a calling card, if you like, it depends on the company. Certainly, the larger, more publicly facing companies, it is a topic of conversation and they do want to engage on it. Smaller companies, it's not really the size of them yet. And we think it will grow increasingly in the future. Higher energy prices get -- the more people are driven from a financial standpoint and the carbon is an additive there as well. So at the moment, early days. It's only bigger, more well-known companies that utilize it, but we'll see it spread, I believe, fully. We are the only people at the moment in the industries that we work in that actually have got these targets. Does that answer your question, Mike?

Yes, absolutely.

And the next question comes from Andrew Douglas from Jefferies.

I've got 2 questions, I mean, probably 2.5, but 2 questions. Can you remind us, please, the timing of the lag effect from an increase in Tooling to an increase in your Automotive revenues? I seem to remember it being kind of 3-ish months, but if you could just remind me kind of what the history tells us that is. And we've heard from 1 or 2 other companies that there is a concern -- or not concern, there's a potential for maybe slightly lagged improvement in Automotive revenues coming through because of stocks in the chain. Do you think that's the same for you guys? Or do you think you'll see the kind of an automatic kind of uptick in your revenues? And then secondly, the old M&A question. Just on the M&A backdrop for you guys as you see it, whether that's changed since the last book.

Yes. Thanks, Andy. So the Tooling as a leading indicator, 3 to 6 months generally. It sort of varies in that kind of area. So as we've seen Tooling tick up in the first half, it points strongly to the second half being a tick up. That's to answer that one. As far as this automotive delay because of stocks in the system, that's not something I can talk to, actually. I can only give you the feedback that we've got from customers and our leading exposure in that is General Motors. Now they've been wrong in the past, but they're saying 20% in the second half. So I don't know about the stocking issue. It's not something we're aware of. I can't see it quite frankly. I would highly doubt it from our kind of work because we tend to be in line. So when they're producing, we're producing. And they haven't been producing a lot. They've been actually in the opposite direction. So I don't think stocks are there because the demand is very strong. Demand is very strong. So I don't know how that actually manifests. As far as the third point, which is M&A, I mean, it's not an accident. We've made the point that we've got a strong balance sheet and it gives us optionality. Certainly, there are targets out there particularly coming out of private equity who seem to have got cold feet at the moment. A lot to do with the fact that the -- I guess, the leverage finance market is pretty [indiscernible] right now. So people are actually -- when there's a bit of stress, they're getting their assets away. So we are looking at things whether they come or not, depends on the negotiations. Does that answer your question, Andy?

Yes. No, that's perfect. I mean one more, can I just ask you quickly about the daily -- the golden screw issue and the daily demand volatility which you talked to in April and May. Is that you guys getting better at managing it is it just becoming less of an issue for you to manage or a bit of both? I'm just trying to figure out kind of supply chain seem to be getting slightly better but don't seem to be getting materially better. I'm just trying to figure out if it's a Bodycote thing or market thing.

I'd love to claim it to be the fact that we actually just walk on water, but there might be a little bit of that. It's more a case that the production planners and our customers are getting much better. That's really what it is. First of all, there is stabilization in terms of their production anyway. But instead of surprising us on a daily basis, it's now on a far better planned. So all in all, it's just brought the volatility right down and we are coping with it.

Next question comes from Harry Philips from Peel Hunt.

A couple of questions, please. The first is around the sort of surcharging -- the sort of lag effect on the surcharge which you've touched upon in the statement. The -- then as we sort of go through how rapid those might unwind and who sort of really initiates that. And then just actually on sort of, what I call, normal pricing, the lag effect on that. How much should we see catch up, if there is any at all, to do in the second half? And then secondly, just around growth CapEx. Apologies, with so many companies this morning. Can you just outline sort of growth CapEx spend this year and maybe next year and a sort of more medium-term strategic profile of what you want to do with that, please?

Okay. So the surcharge lag is ongoing. It's about a month in total. So we don't change the surcharges every day, but it's about a month. On the upside, that's going up. Going down, unless we have a customer come and bang down the door, we don't move it down very fast. There would have to be quite a large drop in the energy price for us to move it down quickly. And I don't see that happening in terms of -- compared to the amount it's gone up. Bigger companies will be more active on it, but I don't see a big problem with actually moving down more slowly than we have moved up. So that should help. In terms of the pricing, I didn't quite understand the pricing question, but I think you're saying is there still a lag on pricing -- price increases. And the only lags we've got left on price increases are the ones associated with the LTAs because they come through on the index. Otherwise, we put our price increases in place. They're well known what we're covering because we're really covering wage inflation. So in a rare instance where we're doing a midterm wage increase, we might have a second price increase for these customers. But essentially, we do pretty much one price increase and then surcharge on a monthly basis. Growth CapEx, that's a Dominique question.

Yes. So we spent GBP 7 million in the first half of the year. And I don't think it's going to materially tick up from that level in the second half of the year. I mean, more generally, we don't have a cap on growth CapEx. If we get good investment opportunities coming through, and we've indicated there are a number of markets where we'd like to expand further and faster, for example, China. So as we get projects coming through that we can get to move forward on them, we'd love to be spending more in this area. But in the short term, I can't see that, that number will be much above the GBP 15 million to GBP 20 million that one might expect based on our first half spend.

I'm sorry, just coming back on the pricing one. Is it more just if you put up prices, say, in May, and obviously, therefore, you've got a sort of second half full effect of that to come through and therefore there has been a sort of accretion in that way? That really was the thrust of the question. So I was just wondering if there's much in that particular context.

Most of the price increases, Harry, were actually put into effect in end of February and March. So they're already in the first half numbers. And the price increase effect, very much lower than the energy surcharges. It's only a couple of 3% maximum on the price increases, whereas the surcharges, the balance of 10%.

The next question comes from Andre Kukhnin from Credit Suisse. .

I'll go one at a time. Firstly, on the topic of energy prices. I wanted to check, to what extent are you now kind of mark-to-market on the energy prices, i.e., can we think about the first half as fully reflecting the current kind of energy spot prices? Or are there still any kind of lagging energy inflation to come through due to contractual agreements that you may have, et cetera?

Well, the way we're looking at our surcharging and buying our energy is we're not looking very far out. So we're looking a quarter out. And what's happening is that as and when we come to buy our energy for the next quarter, we're adjusting our surcharges accordingly. But that's not something that we -- we had the lag impact in the first half because we had to give notice to our customers that we were implementing these surcharges. The surcharges are in place now. So adjusting them is a lot easier and can be done a lot quicker than the original implementation, if you like.

Right. Okay. So if there is any kind of further movement in spot prices, you can just pass through it much more thematically, much more directly?

Indeed. Indeed, yes.

Great. And just to check on the surcharges in Specialist Technologies. How much of sales are covered by the long-term agreements? Because I was just trying to look at that chart, [indiscernible], as you would expect. And it sounds like there was about -- it looks like there was about 6% price or surcharges in Specialist Technologies. So there's only maybe a 4% gap or something like that versus the group.

Well, I mean it's a smaller level in Specialist Technologies because as we highlighted the utility cost in the context of the overall price is lower. I don't know if you've been coming out that numbers by putting a ruler. I'm not sure that's the best way of doing it. So -- and we're not sort of talking about the detail of the divisional subpart of the business because otherwise, we'll be giving away information that we think is of commercial sensitivity. But certainly, the inflation impact in Specialist Technologies is lower. Again, in terms of the percentage of our business that's covered by LTAs in Specialist Technologies, it's a higher proportion than the rest of the business, but it's not something that we disclose precisely.

Got it. I'm just trying to gauge how much of that sort of catch-up of post net price you have in Specialist Technologies. It sounds like we're talking about kind of GBP 1 million tops, but I don't know if you could put a number on that, just from the kind of LTAs pricing catching up.

It's hard to calculate it like that because the way the index works is the average through the year, average to the customers' volume. So it all depends on how the customers' production is going and actually what's happened through the year. I would hate to put the number on those. But it's not going to be massive, Andre. So from that standpoint, it's not going to be something that really moves the needle.

Got it. And just lastly, the main question is kind of on the outsourcing trend, and I know we keep asking about it every conference call. It just feels like there is such a stack-up of reasons why this should be happening and really taking off as a trend. And we've been kind of getting those kind of more and more reasons to do it over the past couple of years and had some good reasons to do it already before the pandemic. Do you think this is now kind of the ultimate catalyst? That extreme energy inflation in Europe, that will finally push some of these customers to pull the trigger and decide? Is this what it takes the kind of German OEMs to finally go away from internal capacity and go outsourced? And did you see any kind of hard evidence of that in terms of maybe things that we can't monitor but you see in terms of customers coming in and inquiring about that?

I agree with you that the pressure is certainly rising. There's no doubt about that. And the high energy prices will be a significant push for people. But in terms of is it happening right now, I have to say that they're in conversation mode but it's not really kicking off at the rate one might expect. I think one of the reasons for that is people -- it did trim back, this is in-house captives. It did trim back on capacities both in people and equipment, writing it off. But -- so when they do see a surge, we would expect to have a more interesting conversations on that. Is it the ultimate catalyst? I don't know about that. But we're still in this mode of it should, in fact, start increasing.

Our next question comes from Sanjay Jha from Panmure Gordon.

I just wanted to ask a question on the -- there's a time graph in your statement on energy security. You talked about the fact that you're moving away from gas-fired to electric-powered, and 3/4 of the profits come from [indiscernible]. And this might benefit you if people move away from Germany. So could you tell us what proportion of your sales is gas-fired and...

It will be less -- sorry, a portion of sales that's gas-fired, it will be more than the 1 quarter, but I don't have that number to hand. I mean, our electrically fired processes are, on average, higher margin processes, which is one of the reasons why we're moving away from the gas-fired processes in the first place.

I don't have an exact number for you, but I did do an estimate. It came in quite late. It's moving towards 1/3 as opposed to a quarter in terms of revenue.

But given what you've just said, I mean, you could sort of take this logic further on and say the whole of Western Europe is been challenged. And would it be fair to say that given that you have no information of all the markets, generally, energy costs are much higher in Western Europe, therefore, more and more of your customers might just move out of Western Europe to the parts of the world may have to think about [indiscernible] Western Europe completely.

Yes. That might be some consideration, but I have to tell you, that's extremely expensive for people, and it would take them over a year. So it's not something that's going to happen in the short term. But if the -- if people think that there's no energy security in Europe for the next 2, 3, 4, 5 years, then that might cause them to do that. Frankly, I don't think that's likely. I think they'll adjust to the new reality. But nobody is going to move fast. It takes far too long to move to both resource just on the thermal processing side, the heat treatment side is a long period, and for them to actually move a new supply chain outside of Europe for people and that stuff. But if they do and they go to their supply chains that are somewhere else, potentially. But we've got pretty good shares. Our lowest share by a mile is in Germany. We've got great shares in North America and the like. So, yes, who knows, but I don't see that happening in the near or even medium term, Sanjay.

Okay. Can I have just one more question, if I may. You mentioned in your presentation that you're not seeing any upping demand from your customers. I mean, I don't know. I presume that you don't know what your visibility is normally, but if there was a certain change, how quickly would you know? How quickly you see a change in demand in your...

So in terms of in Aerospace, we would have a pretty good view of that. Typically, we get an updated forecast every quarter from the customer base to large customers, which are indicative of the smaller ones, too, in Aerospace. And their forecasts are explicit forecasts for 3 to 5 years. So we get pretty good warnings from that. We do get customer information in Automotive. The only problem we've had in the past is that they didn't seem to be very accurate in what they were talking about. But in terms of directionally, they've been -- or they should be fairly good. In General Industrial, we don't have very good visibility in General Industrial. It's thousands and thousands of customers. But the issue with General industrial is because of its diversity and the small nature of the customers, it does not move quickly. It's very slow moving. So when we start seeing -- because we track these, what we call, pressure curves in terms of the daily sales on it. When we start seeing that curve changing, that gives us some visibility, quite good visibility in some respect. So typically, we've got a 3- to 6-month outlook in GI, but it's based on historical trends, and that's because it doesn't move quickly.

Our next question comes from Jonathan Hurn from Barclays.

I just have a few questions, please. Firstly, I just wondered if you could talk a little bit about labor. Obviously, it's the biggest cost in your business. What are you seeing in terms of the inflation coming through labor for you right now? And in terms of offsetting that, can you put that through in terms of pricing? Or is it offset by basically increasing the efficiency of the operations? That was the first one.

Okay. Jonathan, so the labor situation. Thus far, the biggest problem with labor is not the labor inflation, it's the labor availability. So we are seeing an issue in certain places in the world, particularly North America, and places, for example, in Western Europe, where shop floor, blue-collar labor is hard to find. And so when you lose any, it's very hard to backfill. It's not -- a lot of this is not driven by wages, strangely enough. There's a whole bunch of post-COVID effects which are not about money. So that is a bigger concern than inflation. And in terms of the general wage inflation on the cost base, it's not that bad. And so it's in the low single digits, was in the single digits for sure. But in most countries, it's less than 5%, more like 3% or 4%. And it's something that's only done once a year so we can see those things coming in advance. Where we are seeing pressure on wages is actually at the management levels, and there, we're seeing a loss of people. So people will be offered a new job for significantly more money. And it's not because our average is poor because somebody wants somebody at the moment because of the shortages that are out there of certain skills, they'll come in and offer somebody a 40%, 50% increase in pay, and that's hard to turn down. So it's not hitting our actual average cost base very much, but we are putting in retention plans for key management, and we do have some problems in recruiting on labor. So we're looking at all kinds of retention issues. A lot of them are nonfinancial base. But that's what we're doing.

Great. That's super helpful. The second one was just on Aero. Can you just talk about the sort of supply chain there? Is there still inventory in that system that's maybe holding up sort of demand coming through for your product? And also, just if you could sort of touch on where we are on sort of the HIP capacity there. I think you probably put some more capacity in Q2. Am I right in thinking that?

Yes. So the supply chain in Aerospace, it was a talk of the town, of course, Farmborough. The issue seems to not be there at the moment, so notwithstanding that GE's Q3 shortfall, if you like, their sort of slowing of -- well, not slowing but reducing their expected growth rate. I'm not quite sure what's at the bottom of that, but it does not seem to be supply chain problems at the moment. Most people are expecting the supply chain issues to start coming through next year. And those supply chain issues, I mean, the big bugaboo, of course, is the titanium. There's a little bit in wiring harnesses but it's very small. It's not like automotive stuff. I mean, you don't have that many wiring harnesses compared with the auto world. But -- so supply chain issues, people are talking about predominantly hitting next year. And nobody at the moment is brave enough to call exactly how far that it's going to be. Certainly, Airbus, Boeing and the engine makers are not really downgraded in the numbers because of it. We'll see in due course. The second point, remind me, was HIP capacity, I think. The HIP capacity at the moment, we've got good HIP capacity availability, and we are installing more, primarily in North America. We also do have HIPs in storage. So we established a strategic bank because lead times on these things are very long. So we've got a number of HIPs in storage. And in fact, we were just talking the other day in terms of our capacity planning, but we see ordering more equipment come 2025, probably.

Okay. Super helpful. And then maybe just the last one, just in terms of obviously, the outlook and what you're saying the guidance is pretty much unchanged. Just in terms of that sort of H2 bridge, can you just sort of run through the sort of the key moving parts there? Obviously, FX is probably better. Auto probably gets better and maybe price tailwind that you saw in the first half. Can you just sort of give us some sort of moving parts for that just for the second half, that would be great.

Sure. So we wouldn't expect the efficiency shortfall to recur. And as we've indicated, we don't expect the price lag impact to be there either. The restructuring is sort of baked in, so we would expect another GBP 5 million or so to come through from that second half -- not an incremental GBP 5 million, but the same GBP 5 million, if you like, benefit against last year. And then on the volume mix side, it depends what your assumption is around volume. I mean, I guess, our base assumption in terms of not expecting guidance to change is that the volume won't be particularly different from where it was in the first half overall. So hopefully, that answers your question.

[Operator Instructions] We have no further questions, so I'll hand you back to Stephen Harris for closing remarks.

Yes. Well, thanks very much, everybody. I appreciate you listening. And we'll catch up again, hopefully, face-to-face next time. Thanks a lot, and goodbye.

Thank you.