Bodycote plc (BOY) Earnings Call Transcript & Summary

Good morning, and welcome to Bodycote's half year results. I'm Jim Fairbairn, CEO; and with me is our CFO, Ben Fidler. So, as you know, I joined the company in March and following an intense 2.5-month induction program, I was appointed CEO on the 30th of May. With that in mind, I will start today by presenting a top-level view of the results. Ben will then take you through the first half in more detail, and I'll come back and take you through my initial views on some of the opportunities I can see ahead of us. But before we get to that, I'd like to thank my new colleagues somewhere on the webcast, but in particular, Ben, for their openness and support and also for not being shy and giving me some of their views over the last few months. We really do have a unique opportunity for the business going forward. Firstly, key messages. So, as I hope you will see in this presentation, we have delivered good performance in the first half, led again by Specialist Technologies. This is despite a mixed backdrop with some challenging end markets. In particular, I am pleased with the margin progress. Headline operating margins were up 170 basis points to 16.7% and reflects a number of actions we have taken. The ADE margin uplift of 5% is also really pleasing. So, this half has all been about delivering results and also for me, getting out and above. My observations are that the foundations are solid. We have a great team. We have clear brand leadership and also differentiated services. We also have a compelling carbon reduction story. So, I'm excited by the opportunities I can see to unlock further value and these include fine tuning our plant footprint, refining our strategy, and simplifying our reporting. And moving on to our end markets. The market environment has not been easy. However, the diversity of the group's exposure continues to be a real asset. In terms of our end markets, aerospace and defense is up 15% organically and now accounts for almost 30% of revenues. Performance in energy has also been excellent, this reflects a favorable market environment as well as some good market share gains in industrial gas turbines and oil and gas. The automotive market has been more challenging as has industrial markets. This is a continuation of the trends we saw in the second half of last year. And in Consumer, Medical and other, we have seen slow demand in some consumer areas as well as some temporary headwinds in the medical market. The fundamental outlook in medical still remains strong. And with the mixed end market backdrop, we've taken a number of actions to drive performance. In our ADE division, the demand environment has been strong, revenue is up and our focus has been on maximizing operating leverage. We have significantly improved productivity and utilization. As a result, we have been able to keep head count flat despite nearly a 7% revenue growth. And in our North American surface tech business, the strength of our customer relationships has allowed us to renegotiate contracts with some customers, particularly those on long-term agreements. The benefits of these actions is in the excellent margin improvement in the first half. The AGI division has had a more challenging backdrop, reflected in the revenue reduction. We are taking some decisive actions here. Headcount has been reduced by 5% year-on-year, and this has been partly enabled by the 20% reduction in temporary labor. This and other actions are helping to rebalance the level of capacity in the business with the near-term demand level. At the same time, we are retaining the flexibility we need for volumes we cover. With that, I'll pass to Ben.

Well, thank you, Jim, and good morning, and I add my welcome to all of you. Thanks for joining us on what I know is a very busy morning and in fact, quite a busy week for you all. I'm now going to step through our financials in a little bit more detail and some of the key elements of the performance. Revenues, as you can see here, GBP 399 million in the first half that were up 1.5% organically pre-surcharges. Despite what was relatively modest top line growth, we were pleased with the profit progress and we delivered good improvement in organic headline operating profit, up 7% to GBP 66.8 million. As a result of that, the headline operating margin improved well, up 170 basis points to 16.7%, with that progress led by our ADE division as you just heard from Jim. Headline EPS was up 5% to 25p, and the interim dividend was raised by 3% to 6.9p. This next slide shows the numbers in a little bit more detail, gives you the prior year comparators and also, I'll use this slide to talk about cash flow, which appears at the bottom of the slide. Headline operating cash flow was broadly stable at GBP 49.2 million. Free cash flow was lower, entirely due to higher cash tax payments. We'll cover more of that in the cash flow detailed slide a bit later on. So, what were the main drivers of the revenue and profit performance we achieved in the first half of the year? Well, let's start on the left-hand side of this chart and look at revenue first. Stepping from last year's GBP 420 million, you can see 3 or 4 key elements: Firstly, that significant reduction in energy surcharges, which fell just over GBP 19 million or around 50%, reflecting the reduction in energy input costs. Secondly, around 1.5% organic revenue growth, led by strong growth in aerospace and defense and good growth in energy. There was a GBP 4.7 million revenue contribution from the Lake City business, which we acquired in the middle of January. And finally, the currency headwind to revenue of just over GBP 12 million, reflecting sterling strengthening against dollar and euro in particular. Operating profit on the right-hand side of this page, you can see the increase in the drivers up to GBP 66.8 million. Three elements that we pull out here to talk about. Firstly, the good level of drop-through profit on the organic revenue growth we achieved. That reflected the strong operating leverage in ADE. The cost control actions we took in AGI to support the margin there, as well as the improved mix in terms of Specialist Technologies. Additionally, there was also a non-recurrence of around GBP 1.5 million of legal provisions that had impacted the first half of 2023 that you need to take into account. Second, the contribution from Lake City, just over GBP 2 million of profit contribution there. Integration has gone well. The business is trading in line with our expectations. And finally, the currency headwind to profit, which was around GBP 2.4 million. One of our key focus areas is driving ongoing improvement in returns and it was positive to see further good progress in terms of the margin improvement we achieved in the first half with margins increasing to 16.7%. That reflected a few factors. Firstly, the continued mix shift to Specialist Technologies, which as you know, is delivering high growth and also delivers higher margins than our Classical Heat Treatment business. The good margin increase in the ADE division reflecting both strong drop-through margin and the operational improvements we made in our HIP business compared to the first half of last year. And finally, the relatively resilient margins in AGI despite its weaker revenues. Overall, we continue to see a path to achieving margins in excess of 20% over the medium term. Let's look at Specialist Technologies now in a little bit more detail. We are very pleased with the performance of Specialist Technologies, again delivered strong growth in the first half of the year. Organic revenue is up 8%, you can see here that was 10 percentage points ahead of our Classical Heat Treatment business. This continues very much the long-term premium growth trend that we've seen Specialist Technologies deliver over the last 5 to 6 years. And we expect that ongoing higher rate of growth to continue, that's going to be underpinned ultimately by the increased levels of adoption of those Specialist Technologies processes, which are both technically superior as well as offering significant carbon reduction. Reflecting this, we are investing further to expand our footprint to provide the needed capacity to cater for that future growth. A new HIP facility has just come online in the U.S., and we are expanding our other elements of HIP capacity in both the U.S. and in Europe at the moment. New S3P investments, that's our stainless steel specialist hardening business, investments are underway there in Europe, which will start to come on stream over the next 12 months or so. Jim gave an overview earlier on the markets, but I'd now like to turn to look at those in a little bit more detail as we step through the 3 key end markets. So firstly, aerospace and defense. Around 30% of the group's revenue base. Performance here was strong with 11% organic revenue growth and 15% excluding surcharges. We achieved good growth of 14% in commercial aerospace, where the medium-term outlook remains very good supported by future production rate increases at both airframe OEMs that are underpinned by their large backlogs. In Commercial Aerospace, we do still expect good growth for the year, but we do need to stay mindful of the potential for a temporary moderation of growth in the second half in commercial aerospace. As the comparison base gets tougher and also as supply chains have a little element of rebalancing during the second half, reflecting some of the recent production rate changes that I'm sure you're all aware of that have been announced by Boeing, by Airbus and flowing down into some of the engine guys, in particular, GE on the LEAP program. We still expect good growth for the full year for Commercial Aerospace though, and we're still very confident about the medium-term prospects for commercial aerospace. Defense growth, very strong at 18% in the first half, and we saw that broad-based strength across both the U.S. and Europe driven by both platform-related products as well as consumables. Automotive, around 25% of the group. It was more challenging. Revenues fell by 1% organically, excluding surcharges against what was a tough comparator base for the first half of 2023, you can see that pretty clearly looking at the bar chart in the middle of the page. We've done relatively well against a weak production environment. Western Europe, as you can see, is our largest geographic segment still within automotive and Western European light vehicle production rates were down around 8% in the first half. There are growing questions around the rate of transition to electric vehicles. Calling the exact pace of this is difficult, and that's why we'll stick with our tried-and-tested approach, which is ensuring we're positioned with a portfolio of exposures covering both powertrain agnostic parts together with other powertrain-related exposures that are spread nicely across ICE, hybrid and a growing EV content. Our auto revenue growth in China is worth pulling out. We are pleased with that in the first half, up 10%. As you've probably heard us talk in the past, we've been actively targeting more content with the Chinese OEMs and positively, we have seen some progress delivered there. It's also going to be interesting to see how the Chinese OEMs expansion plans into manufacturing facilities into Eastern Europe and Turkey progress. Both Eastern Europe and Turkey, as you know, are areas where we have a good presence in Heat Treatment. General Industrial, which is around 45% of group revenues was also challenging in the first half, with revenues minus 4%, excluding surcharges. The weakness was particularly focused in Europe. As you can see in the donut chart on this slide, we've now moved to sub-segment our general industrial into 3 main areas, which we hope helps your understanding a little bit of some of the drivers for these respective areas of our GI business. The first and the largest of these is industrial markets, includes things like machinery, manufacturing and other industrial-related sub-segments. Demand here was soft, down 7%, with the weakness very much focused in Europe, which was down 10%. Within these industrial end markets, there were those some positive brighter spots. Mining grew well in the first half and tooling end markets also turned modestly positive. In Energy, we continued strong growth there, up 10%, led by good industrial gas turbine demand in the U.S. and supported with some nice new customer wins that we secured on that. And we achieved continued good growth in our Surface Technology's business relating to oil and gas. The third segment, Consumer, Medical and other, was broadly flat in constant currency terms in the first half, but down organically with a little bit of weakness in our medical revenues in the first half due to destocking and a couple of temporary customer-specific production issues. We remain confident though on the midterm outlook and the structural growth outlook for medical. Over the last few years, the group has been working on a new ERP solution that's based around SAP. This had been developed to cover both finance as well as purchasing and operational activities. The pilot rollout phase has been underway for the last 9 months across a small number of our 165 plants. Reflecting the lessons that we've learned during this pilot phase and after some very careful consideration, we've taken the limit -- the decision to limit the scope of the rollout. Finance and purchasing is progressing well. We're confident it will deliver value, and we'll continue with that element of the program. That should complete in early 2026. The rollout of the operations element of SAP, however, will cease, reflecting the challenges we've encountered during the pilot rollout and also a detailed review that we've done around the cost benefit disruption trade-off. It's been a very carefully considered decision I can assure you that Jim and I have taken and one that reduces disruption risk and will save a bit on our future implementation costs, but it has led to a GBP 28.3 million noncash write-off, which has been taken as an exceptional charge as you saw in the first half of the year. Now turning to cash flow. Headline operating cash flow increased modestly year-over-year to GBP 49.2 million, that was 74% conversion from operating profit. We continue the focus we've had on working capital. CapEx was broadly flat in the first half, as you can see. There was a higher level of provision outflow also in the first half of the year to settle a legacy environmental matter. Free cash flow reduced by GBP 17 million to GBP 26 million. As you'll see here, that was entirely due to higher cash tax. Cash tax, you may well recall, was unusually low in the first half of last year due to a refund from prior years that we benefited from in H1 2023. We knew that wasn't going to recur. We continue to approach capital allocation with discipline to achieve balance and to drive shareholder value. In the first half, you can see here, we deployed GBP 35 million overall on capital expenditure, covering both maintenance and expansionary CapEx. That was flat versus the first half of 2023, but I do expect CapEx overall to be modestly higher for the full year. We paid to shareholders GBP 30.1 million in ordinary dividends and as you saw this morning, we've raised our interim dividend by 3%, continuing our 36-year unbroken record of maintaining or growing the dividend. The GBP 52 million acquisition of Lake City closed in mid-January and that's been a very positive addition to our Specialist Technologies business and is performing well. And finally, we deployed GBP 25.8 million on our share buyback in the first half. The first GBP 30 million tranche of the buyback completed last week, and as you'll see, subject to a separate announcement this morning, we've now commenced the second GBP 30 million tranche of the buyback. The balance sheet for the group remains in very good shape. Excluding IFRS 16 lease liabilities, we've got net debt of GBP 68 million at the end of the first half, that's 0.7x net debt to EBITDA. Finally, as we look to 2024 full year, a few details to update on technical guidance. I'm not going to go through everything on this slide, but let's just focus on the key items that have changed since I last shared this with you in March. First on FX. If current rates are maintained, this could now see around a GBP 25 million revenue impact and a GBP 5 million potential profit impact. Those are higher than the numbers we talked about in March, around GBP 1 million higher for profit and about GBP 7 million higher for revenue just reflecting the recent strengthening in sterling. Second also the flag is cash tax. We now expect that to be around GBP 30 million for the full year, which is around GBP 10 million higher than we'd flagged in March just due to timing and the phasing of catch-up payments. With that, I'll now hand back to Jim to focus on his reflections on the business and the opportunities that we see for the path ahead for Bodycote.

Thank you, Ben. Bodycote is a great company, and there's lots of opportunity to improve it. Joining the company has really been a wonderful experience so far as a mechanical engineer, reacquainting myself with metallurgy and understanding the complicated processes, our accreditations and the critical applications we service on a day-to-day basis has been a real joy. From my travels, here are the observations that I have. First, the -- sorry, the 3 boxes in the top half are all interlinked. They represent the core value proposition we offer for our customers. We have deep competence in metallurgy. This is underpinned by our people, who are highly passionate about what they do and also who love problem solving for our customers. Our brand is recognized and trusted, the processes we offer are genuinely differentiated with significant barriers to entry. I'd like to give you an example of these factors in action. In Poland, at the moment, we're working with the R&D team of a major Japanese auto OEM and they were looking for expertise in designing a treatment process for a new type of gear that will be used in electric vehicles and they have asked us to provide end-to-end help with everything from the grade of material to the exact treatment approach through to training. This sort of know-how and problem-solving expertise takes years to develop, and it has a clear value proposition when it comes to pricing. That's Box 1 to 3 in action. Moving down to the bottom left box, unique is often an overused word, but it really applies to our carbon proposition. We can offer our customers a reduction in their emissions if they switch from in-house Heat Treatment to using Bodycote. In part, this is achieved through being more efficient, it is also done by using newer, more efficient processes that use far less energy in the Heat Treatment process. So, when we process a part, emissions can be up to 60% lower than the in-house alternative. This really has a positive impact for both our customers and society and also has the potential to be a major growth driver for the group. And we are also continuing to work to become even more efficient, so the more that we reduce our own carbon footprint, the better the carbon outcomes for our customers. And in the first half of this year alone, we have reduced our carbon emissions by 7.5%. So, under my leadership, I am fully committed to building on the great progress that has been made to amplify a positive impact, providing efficient and more sustainable solutions on a global scale. In the middle, at the bottom are our markets. The diversity and balance of the portfolio can help us offset headwinds like the ones we've seen in industrial and automotive in the first half. We have good exposure to some excellent growth markets and mega trends, and we'll look to capitalize further in this area. Finally, cost management. Bodycote has made significant progress in creating an agile cost base with the ability to flex a portion of the labor cost and to respond quickly to downturns. It's part of the DNA of the business, and we are seeing it in action with the steps we are taking in our AGI division. So, it's been a great first few months looking under the hood of the business. And I've been spending time at many sites as possible covering all the major processes in all of our key geographies as well as meeting with a wide range of employees and also external stakeholders. In terms of what I think I learned, I think there are 3 things that have particularly struck me. First, what I have seen has absolutely confirmed the attractiveness of our Specialist Technologies. These are really differentiated with exceptionally high barriers to entry and a huge amount of engineering know-how and expertise. I visited HIP sites in the U.S. and Europe and an S3P plant in Germany, and the engineering prowess and team ambition there is extremely high. Secondly, the name Classical Heat Treatment in my view is somewhat misleading. It gives the impression of a low-quality commodity business. And while, okay, there are elements of that within the portfolio, the majority of what we budget as Classical Heat Treatment is high-quality sophisticated engineering. And there are barriers to entry around know-how accreditation and customer relationships. And we also differentiate through our problem-solving capability and also the breadth of our assets as the market leader. So, we're going to double down on the areas that make us more differentiated and also higher quality. And thirdly, there is a wide range of operational variability across our plants, and we have a very large number of good sites but there's also a tail of sites where the operational and financial performance is actually below where we'd like it to be. And as you can see on the time line over the past few months, my focus has been on learning the business as well as executing some quick wins, particularly around some of the cost base as we discussed earlier. So, we see multiple ways of increasing profitability and driving growth. Firstly, as I've said, we need to fine tune our footprint and tackle the tail of underperforming sites. To be clear, there's not a lot of these, but there are enough that it presents a value opportunity, and we are in the process of creating granular plans for these underperformers. Second, we can raise our game across the board when it comes to operational excellence. So, we need to increase standardization, embed lean capability and really get better at sharing best practice and also leveraging our scale. They're all -- there are already areas of excellence within the company but we really need to consistently deliver at that level across the whole portfolio. And the third area is to think about our growth strategy. I think we've got a strong foundation here so it's not about I've to rethink. It's really about creating a clear growth strategy built around the differentiated processes that we have. We can also improve our commercial strategy and where we can be better at working across divisions and getting even closer to our customers. Finally, we're all aware that our reporting can be a little bit confusing. We talk about the business through a matrix of divisions, end markets, geographies, and processes. Our opportunity is to simplify this, and we are actively looking at that right now. So, our expectation is to have something that is simpler, cleaner, and also more aligned to the strategy. So, I want to finish talking about the outlook for this year and then summarizing. So, our full year expectations are unchanged, and we expect to deliver organic revenue growth, excluding surcharges with further year-on-year margin progress. This outlook is despite some of the challenging end markets we have talked about and is underpinned by the actions we're taking across the business that we discussed earlier. So, to close, I think we're very pleased with the performance in the first half, and we are continuing to drive the right actions to deliver our full year outlook. The business is really in good shape and we're also excited about the room for further improvement and hopefully, you got a flavor of that from what we walked you through today. And there's lots to be done and I'm looking forward to coming back in due course to tell you about progress. With that, Ben and I will open up to questions.

It's Andrew Douglas from Jefferies. I've got quite a few questions, but I'll start with 3 and then I'll jump back into the queue. Can you just talk a little bit more, I don't still get some of your -- later in the year or next year when you come out with the grand plan. But in terms of footprint, you talk about the underperformers, how long will it take to either sort them out or do whatever you need to do with them? Is that a kind of 12, 18-month strategy or is that something that kind of goes into 2, 3 years? And the footprint there is clearly about the underperformers, whether this gets straddled with the growth. Is there an opportunity in your view to expand that footprint geographically?

Certainly, from my perspective, it's too early to give any concrete plans at the moment. I mean work is underway. I would say it is actually fine-tuning, it's a very small proportion of the sites we have in our portfolio. This isn't about major surgery, it's about fine-tuning. I think you shouldn't assume that it's all about closing. We can consolidate, we can repurpose, we've got mass of assets, and definitely, there are still some to be looked at. So, I think it's going to take a number of months to work through that and I think the plan would take between 12 and 24 months to execute. Well, in terms of the growth, yes, one of the -- one of the opportunities, okay, around kind of looking at a footprint as you can be quite creative around -- could a divisional site in one division do something for a different division. So that -- that is also something that we're looking at. So, this isn't just about margin improvement, it is also fundamental to look at growth as well.

One of the, I guess, key strengths of the first half results was the cost control. How long can you keep head count flat in ADE given that's going to be good growth over time? And on AGI, have you set the cost base now for a bit more of a decline in organic growth in the second half or is that something that you kind of need to keep an eye on?

So look, on ADE we can keep head count flat for as long as we want to. At the end of the day, it's within our power to control, and we do tightly control that. The answer as well is that we were mindful as we went through the first half of some of the supply chain challenges that have existed in aerospace. And therefore, a, it didn't want to get ahead of ourselves and certainly, we're extremely pleased we haven't in terms of head count and hiring as we enter a short period of a little bit of rebalancing, still growth in the second half, but a bit of rebalancing. And clearly, at some point, and as we look ahead over the next 2 to 3 years, where we are confident of medium-term good growth continuing in aerospace and defense, we will have to add more heads, but we're happy with where we are. We're pleased with the performance of ADE in the first half, and we will be adding more heads over time, but we think we're in the -- in a good place in the right shape to cope with some of this rebalancing that may have to happen during the second half.

In terms of AGI, I mean we have actually rebalanced the capacity to what we see coming down the tracks. And the way that we would characterize it is that we're continuing to feel the bottom of these markets. I mean, operationally within the business -- I mean, the operational presence and all that are very much focused on a week-by-week, month-to-month basis. I think keep that balanced. And also, it's important that we stay agile as we go forward. So, if we have to do more, we will, hopefully, we are at the bottom of these AGI markets.

And the last one. On the price negotiation, I think, in Service Tech, are there other opportunities for price renegotiations on kind of long-term contracts or was this just a bit of an anomaly?

If I take that one. There is -- remember the bulk of our business is not on long-term contracts still. So, 75% or so of the business not on long-term contracts. And there, this year, as with every year previously, we typically always put pricing up and are successful in doing that. So, it still remains the smaller part of Bodycote that is impacted by these long-term agreements. In this particular case, it was a rather sizable contract with a rather sizable customer that dated back to a business prior to the point in time when we acquired that business and that is why it was particularly important that we did it. It was a fairly extended and painful negotiation, as you know, we stuck to our guns. I think it was interesting evidence of the strength of our position, our customer relationship, the importance of accreditations and quality that we offer to those customers and this particular customer that it was something that they didn't wantingly go along with, but they recognized they had to because of the value that we brought to them. Are there other opportunities? There have been some other opportunities of doing that. We've done it with a few other customers where we had to. Yes, typically, a lot of our LTAs and certainly those that we have signed more recently tend to have a natural inflator clause where at least there is some degree of share line. This particular one that you're referencing is one that actually had flat pricing.

It's Harry Philips, Peel Hunt. Sorry like Andy, 3, I'm afraid. The first one is just on the -- an update on the EV contracts that have been talked about over the last year or so and obviously, with that sort of EV transition in Europe just a bit slower at the moment, just where you are in offtake and scale and just say, a general update there. The second is just in terms of the sort of model really, the surcharge revenue maths for this year, you sort of had 67% last year. I haven't had a chance to do the, I think it's about GBP 20 million drop off in the first half. Is it sort of same again, but I need just update on that? And then lastly, and this would be my naivety, but GBP 28.3 million write-off sort of seems pretty big to me. As I say, that could be my -- it certainly is, but [ 28.3 ] is mighty big.

So firstly, the update on the EV contracts. As you know, we secured 2 or 3 nice wins in the EV and actually, one of them was hybrid remember as well last year, 2 in Europe and 1 at the start of this year, actually, that was in the U.S. Those are ramping. Inevitably, under all of these types of new contract wins, whether -- regardless of whether it's EV, ICE or hybrid, anything in the world of automotive, you go through a fairly extended PPAP, preproduction approval process. So it doesn't from day 1, suddenly ramp up to full rate. And that PPAP process and ramp-up can typically take anything from 12 to in some cases, even 24 months. Particularly in the case where as you might expect, the rate of the steepness of the ramp-up curve for some of these new EV contracts is maybe not what the original auto OEMs might have thought 2 years ago. That's a reflection of where the world is today. They are ramping up and they will continue to grow. At the moment, those wins are still in their fairly early stages but we're confident that it will be a growing part of the portfolio. We've also secured some further new exposures and contract wins that aren't so sizable, hence, we haven't really talked about them. I mentioned it about the China growth of 10%. Part of that is actually underpinned by some new positions that we've developed with the Chinese OEMs, not necessarily on powertrain-related parts, but powertrain agnostic parts, brake systems, steering system components, often on electric vehicles, though typically on electric vehicles actually because that's the dominant driver of growth within China. So, we're very happy with how that is going. It's going to be a bit more of an extended changeover between internal combustion engine, hybrid vehicles and EV vehicles. The key for us is just to ensure we've got a portfolio that covers all horses essentially, which we have today. Remember, overall in auto, round about half of our automotive exposure is powertrain agnostic parts anyway. Your second question was around surcharge maths. So yes, down around GBP 19 million in the first half, 50% also reduction. Steepest reduction you would naturally expect to take place in the first half because surcharges peaked in Q1 2023. So, they were already on a declining curve as we go through the second half of this year. I would expect, assuming energy prices remain where they are, surcharges to come down further for the full year, but probably half the level of reduction in the second half compared to that circa GBP 20 million in the first half. The final question you had was about the SAP write-off, the GBP 28.3 million. Yes, it is a relatively sizable number, we're not going to shy away from that. It reflects multiple years' worth of spend on that. It's a program that we started to spend on in 2020, which was in our accounts, and you can go back, and you'll see that in the tables at the back. But it's not as if that's a single year's worth of spend. You need to think about that over multiple years, and therefore, if you sort of divide it by 4 or so you end up saying, okay. The issue of flags is these programs are not cheap, they're never cheap. Continuing the rollout would have also incurred a significant level of cash spend to complete it as well as the disruption aspects. And those are some of the pieces, particularly the disruption aspects that fed into the decision that we took.

Tom Elgar from Deutsche Bank. Two areas of questioning, if I may. First one, just trying to drill down a little bit more into that industrial vertical that you've hopefully revealed today. Just trying to get the trends through the half, but maybe especially since you last spoke to the market in April about what you're seeing there. I think you talked about last time seeing some sequential improvements in a few of the verticals, PMI linked verticals. Could you maybe just start there?

May and June, you can see from the maths and the numbers that we reported today versus the numbers that we reported at the AGM. For the general industrial, including energy, that whole unit, yes, it was quite weak as we went through May and June. Predominantly focused in Europe, it was weaker than we had expected at that point, partly reflected in some of the additional cost actions that we took. So, we worked and acted quickly to respond to that. What I would also say is that there was a bit of a working day effect as well, which didn't help us as we went through May and June. It's not huge, but there were 2 fewer working days that you also need to take into consideration that you didn't have in the first 4 months of the year. But look, in Europe, in particular, you look at it when you look at PMIs, it's a tough environment. It feels, as Jim said earlier, like we're continuing to bump along the bottom. There are some glimmers of hope if we think about some of the sub-segment tolling, for example, that was up a little bit. And also, do bear in mind that as we go into the second half of the year, the comparators get significantly easier. So, if you think about that, the industrial piece of our general industrial segment, that was minus 7% in the first half. If you actually look sequentially over the second half of last year, it was up 7%. And we're not saying expect amazing growth in the second half, but the point is, even if it stays at current levels and we continue to bump on the bottom, just a pure pump effect, it's not impossible that we should be in positive growth territory for that industrial piece in the second half of the year just because of the year-over-year effect.

Just secondly, trying to just unpick that there's a narrative around the medical business. Can you sort of give any color around the extent of that business that is impacted by the destocking that you've mentioned? Just to give a bit more color there, maybe.

Destocking is always inherently one of those difficult things to gauge because the customers don't phone you up and say, "Oh, by the way, I'm destocking". They just either don't phone you up or the levels of throughput that you see. But why we are sure that it is an element of destocking is because of the speed with which you've seen the demand switch. So medical remember was up 24% or so last year and you've gone from 24% to something that is down around about 10%, 15% or so. So that's kind of not a normalized smooth demand trend. I think it's reflective of there was a degree of catch-up post-COVID in a number of operating procedures that took place for orthopedic procedures, which is what really drives our business. That now rebalanced back to a much more normalized level and will continue to grow driven by the secular dynamics of aging population, et cetera, that probably say that is going to be a 5%, 6% type of annual growth market. There were also a couple of customer-specific points that I referenced. One of our larger customers had some significant equipment downtime for a month that impacted. And secondly, we're also in the process of moving some of the equipment, the hardware that we process some of these parts between our sites in the first half of the year that meant there was a bit of a hiatus in our ability to -- we always knew about that, but our ability to process those customer parts. Neither of those in isolation are big numbers, but the issue is they can move the needle in a segment that is the size of medical for us. But medium term, we're still happy with that market, more than happy with that market. We see attractive secular growth trends, we have a good market position and it delivers good returns for us.

I've had a couple of e-mail. So, one for Jim, which is if you could talk about what's surprised you positively, negatively since joining? And secondly, not specifically to either of you, but the plans you talked about and the opportunities, how they play into the previous 20% margin guidance that's been given?

In terms of coming into Bodycote, I mean, Bodycote is really a wonderful company. I think the quality and standard of engineering and the know-how around process and around how to apply that for the benefit of the company, our customer base and just the passion around that is utterly phenomenal. And I think that was actually definitely better. And so, my dozens of trips over the last few months, especially seeing our Specialist Technologies, but most of the sites, all the processes that have seen passionate people, all about metallurgy and applying it for our customer is actually really within our DNA. So, it surpassed my expectations on that side. And I think on another side, I'll be perfectly frank, a little bit surprised at the amount of variability in the company in terms of operational performance and just being able to share between sites and between divisions. And we have got pockets of excellence in safety in lean places like that, but it isn't consistent and that's actually great because that's an opportunity for us. And that's right in my wheelhouse, if you like. So that's the exciting part along, okay, with all the good stuff this is actually quite exciting for me. I think in terms of getting to 20% -- 20% plus. I can I think it'd be done -- I think it can be done absolutely. For me, it's a mix of factors. I mean, operational improvement is obviously one. And what we've announced to look at a program of a -- looking at this tailor sites is actually part of one of the legs of actually getting us to 20%. I mean, others are obviously the mix of the business as we grow our Specialist Technology, it's typically higher margin, okay, so that will help. And I mean there's also growth markets. We haven't really mentioned, I mean, emerging markets and part of the different emphasis in reporting but it's still a fundamental part of our business because that's long term. Ben and I visited Turkey a few months ago and just the quality of the team -- we had just opened a new site there and just the passion and the capability. And as that business and kind of country is actually growing, there will be more investment from China coming in. I just think we're well placed. So, I think getting to north of 20% is a combination of these factors. And obviously, doing more in the operational side of things is actually more within our gift. We can control that.

Just following on from your comments on your carbon proposition. Has that made good progress in the year? I appreciate your kind of -- your customers need to kind of push it and you guys need to push it. How has that progressed? Because it was largely in kind of scanty in Europe? Any progress in the U.S.? And have you guys thought about how you could maybe push that harder if the customers aren't? Can you do more?

Yes. I mean we can do -- we've just actually launched a revision of carbon calculator, which we can take to customers and at the moment, there's some training kind of going on just to help energize that. This isn't an overnight thing, this is more longer because there are some strategic decisions to be made by our customers. But it is an important area for our customers, particularly those that have got SBTi targets that we can help offset overall carbon footprint. So, it's actually definitely an area that's gaining momentum as we take it through and we also have to set that example to our customers. And obviously, we mentioned, I mean, the 7.5% year-on-year, which is quite remarkable, if you think about it, and that's a combination of things. Energy efficiency and also thinking about processes and thinking about productivity. So, we'll keep going with that, I'm not saying we'll get 7.5% every year. But we really want to be a sustainability leader both as an example and also for our customers and that's certainly one of the growth avenues that we want to take forward. Okay. Well, thanks, everyone, for coming. I appreciate your questions, safe journey home.