Bodycote plc (BOY) Earnings Call Transcript & Summary

Good morning, and welcome to Bodycote's 2024 and Full Year Results. I'm Jim Fairbairn, CEO; and with me is our CFO, Ben Fidler. So I'll kick off today with a summary. Ben will then take you through the full year in more detail, and I'll come back and take you through some of the strategic progress we're making and our outlook for the year. I'm very proud of how we performed in '24 in difficult markets. It was a tough trading year, but we delivered. In terms of progress, I'm particularly pleased of the margin improvement that we've managed to pull through. We've improved our business mix, flexed our cost base and grown in key markets. Last year was also a significant year for the business in terms of strategic progress. We completed a full review of the strategy. We presented a capital markets event with 5 medium-term financial targets and a further 4 related to sustainability. We created 2 leading divisions with clear strategies. We have 3 company-wide strategic levers, optimize, perform and grow, which are driving our internal focus to improve the company. I'm also pleased with the way that the team has responded to the new direction for the business. As you will recall, 40% of my team are new and the whole team's energy and application has been outstanding. Going forward, the overall aim here is to elevate the quality of the business to make it less cyclical, higher margin and make it capable of consistent revenue growth. I'm absolutely confident there's a great deal of shareholder value to unlock in Bodycote. Turning to the 5 financial targets that I just mentioned. We've made early progress on all of them. Our core business grew 1% organically and adding in Lake City, it grew 2.4%. Considering the challenging point in the cycle in many of our markets, that's a good performance relative to our -- to the mid-single digit through cycle ambition. I'd particularly like to highlight the margin progression from 15.9% to 17%. This is from a combination of mix, operational leverage and self-help driving productivity improvements. I'll come to some examples on productivity later. ROCE at 15.7% and operating cash conversion at 90% are within the target range, reflecting our continued discipline on capital allocation, and the efforts of the operational and finance teams. We made great progress in '24. And with the backdrop of difficult industrial markets, we will continue to focus on controlling what we can control. Turning to growth. We had a resilient performance in '24 despite those challenging markets, and this is attributable to what we do and our wide diversification in end markets. Our core growth was underpinned by a good performance in Spec Tech, which grew 5% in the year. Precision Heat Treatment was resilient, broadly flat for the year, and we are taking steps to further improve the quality of this division. The left-hand chart illustrates the dilutive impact of our newly designated noncore segment in terms of growth and noncore for us is cyclical, high carbon, low-margin processes. Profit in noncore is either loss-making or just over breakeven. And as a reminder, we plan to exit this activity over the next 18 to 24 months. We also saw variable end market performance. As expected, Aerospace performed well and in line with expectations. Growth slowed a bit in the second half due to supply chain issues, but there was good growth for the year, and we expect further growth this year. Energy was also a good performer, including the benefit from a high-value project, which ended in 2024. And we outperformed the market in automotive with a solid performance in China and Mexico offsetting performance in North America and Europe. Industrial markets, as widely noted, were difficult. So a mixed end market picture overall with some year challenges -- sorry, with some real challenges, which makes the performance in '24 more pleasing. I'll hand over to Ben now to take you through the detail.

Well, thank you, Jim. And just to add, my welcome to all of you. Thanks for coming along this Friday morning. I'm now going to step through in a little bit more detail, the key elements of our financial performance in 2024. I also want to just cover and discuss our capital allocation and to cover some more technical aspects of our guidance as we look forward to 2025. So let's start off with some of the highlights from 2024. You can see them up here. Organic revenue growth, excluding surcharges in the core business was up 1%, a positive performance, we think, against what were some challenging end markets, particularly in Industrial and some elements of Automotive. As you know, we placed a lot of focus on driving efficiency and driving operating margins and on cost agility. And in that context, we were proud with the performance we delivered on margins, up 120 basis points to 17.9% for the core business. Cash conversion, always a core strength of Bodycote and 2024 was another year of good cash flow and good cash conversion at 90%. Reflecting the high level of profitability and our ongoing discipline and focus on deploying capital effectively and wisely, it was nice to also see that return on capital employed increased by 90 basis points to 15.7%. And we did all of these things while achieving a 6% reduction in our carbon emissions and have delivered on our old SBTi targets well ahead of plan. As you'll remember, I'm sure from our Capital Markets event in December, we've now launched some even more ambitious carbon reduction targets for 2030. And finally, another year of balanced and disciplined capital allocation. We returned over GBP 100 million to shareholders through dividends and share buybacks, whilst investing in M&A and in organic capital investment. I'll cover more on that later. So now a deeper dive into the numbers. As we execute the restructuring activities under the optimized leg of our strategy, we've placed into a noncore division the parts of the portfolio that we're going to be exiting from. Strip those out and you're then looking at the core business, which is the focus of the top half of this slide. That delivered 1% organic revenue growth pre surcharges. It delivered 3% organic profit growth with core operating profit of GBP 127.6 million. Add the noncore businesses in and state the obvious, you get to the group, how did the group perform. Through the group lens, revenues GBP 757 million, down 4% organically, but flat once the noise of surcharges has reduced. It's also worth by the way, saying at this point that with surcharges now having reduced to a much lower level, this will be the last time that we're going to split those out going forward, just in the interest of making our revenue reporting a little bit simpler for you. We do though expect surcharges to fall a little bit further in 2025, which will be a modest headwind to our revenue growth. For the group, operating profit was GBP 129 million, up 1.7% organically, reflecting the higher financing costs, but also the lower share count. Adjusted EPS was up 0.4% to 48.6p. And the full year dividend, as I'm sure you've seen, was up 1.3% to 23p. Let's now look at the drivers of that group profit performance in a little bit more detail in this bridge, which pulls out the key elements. Good performance in Specialist Technologies, which contributed around GBP 11 million to profit growth through a combination of revenue growth and some good margin expansion. Precision Heat Treatment much more impacted by the weak end market environment in automotive and industrial, that saw an GBP 8 million reduction in profit. Noncore profits also lower fell by GBP 1.4 million. Remember, those noncore businesses much more heavily exposed to automotive and industrial than the rest of the group. Central costs were just under GBP 4.5 million lower largely reflecting lower share-based incentive payment costs. And finally, FX, which was a GBP 4.9 million headwind to profit year-over-year. Added all together, that got us to GBP 129 million of group operating profit, what we believe was a resilient performance in the face of some clear end market top line challenges. At our Capital Markets event in December, we unveiled a number of financial targets. One of these was laying out the path to improving our operating margin to more than 20% by 2028, driven by the various strategic initiatives and the actions that are now very well underway. And we're pleased with the progress we achieved in 2024 on this, a further good step-up in our operating margins with the core businesses increasing by 120 basis points to 17.9% led by Specialist Technologies. Group margins, you can also see, called out here rose by a similar 110 basis points to 17%. Now as we look ahead over the coming 3 years, we remain very confident on delivering continued progress in margins to achieve our target of more than 20% by 2028, won't necessarily be linear every single year, but 2024 was a good start on that journey, and the improvement still to build up and come from optimize, perform and grow. I'd now like to look at the performance of the divisions in a little bit more detail. Remember, our new divisions. So firstly, Specialist Technologies had another good year despite the market backdrop. Revenues up 5% organically, excluding the lower surcharge effect. Yes, that is a moderation from the historical rates of growth this division has delivered. But given how tough a number of the end markets were for Specialist Technologies, particularly in Industrial, it does show the underlying quality of the business. In the donut chart on the bottom right-hand side, you can see the division's end market breakout. Now Jim has already taken you through the group-wide picture there. You can see for Specialist Technologies, it clearly benefited from its large exposure to Aerospace & Defense, which is its biggest end market segment. Also, it benefited from Energy, where growth in 2024 was good, supported by some project-specific work in oil and gas that came to an end late in '24. The team are working hard to replace that work with a pipeline of further opportunities that's actively being pursued as we speak. Specialist Technologies is less exposed to automotive and industrial where conditions were tougher, but it did experience a revenue drag from its industrial markets. Margin progress, you can see here was very strong in Specialist Technologies, up 300 basis points to 29%, led by the revenue progress and, in particular, helped with some step-ups in operational execution and improvement in our HIP business. The Lake City acquisition also falls into Specialist Technologies. Performed well, delivering margins close to 40% and with a further small element of the driver in the margin improvement in the division. So overall, how would I frame it? Another good year for Specialist Technologies. And the focus here very much remains on laying the groundwork to enable us to continue to deliver on the medium-term growth ambitions we have for this division, as we drive increasing adoption of its processes and technologies and invest for growth in this area. Let's now turn to Precision Heat Treatment. Because of the mix of the business, the challenging end market environment in automotive and industrial had a larger impact, not surprisingly on its revenue and on its profit. Nevertheless, we were pleased with what we think was a pretty resilient performance. On an organic basis, looking through the noise of surcharges, revenue fell by 0.8%. You can see in the doughnut chart broken out, strong growth in Aerospace & Defense of almost 9% and we did outperform the tough market in Automotive, growing 1%, driven largely by the growth we experienced and worked hard to drive in emerging markets, Mexico and China, in particular. Margins at Precision Heat Treatment were resilient. Yes, they were down, but only a 60 basis point reduction to what we think was a pretty strong 17% still at this point in the cycle. And that reflected the continued and very proactive work to manage the cost base to deal with the temporary lower volume environment through managing labor, through managing shift patterns and optimizing and reducing working hours. There's a lot of work from the team that went in to achieve and deliver that. And those are very much things that we continue to focus on and progress with as we go through the first half of this year. Exceptional items next. As you may well remember and discussed at our December Capital Markets event, the new strategic optimization program that we launched has led to some significant exceptional charges. You saw those in the 2024 numbers, all of which remember, are about enabling us to deliver a better quality Bodycote, a better business with higher margins and enhanced mid- to long-term growth potential. Total exceptional costs, GBP 78.3 million were really explained by 3 main elements, and I'll talk to them left to right on this chart. Firstly, a restructuring charge of GBP 31.9 million that covered the optimization program as we commenced at pace with delivery and execution on this. In total, remember, we expect around a GBP 60 million P&L charge on the optimization program, with the majority of the remainder of this P&L charge likely to come in 2025, maybe a small tailwind to 2026. As a reminder, the net cash cost on that program will be around GBP 25 million to GBP 30 million. You already saw a small level of that in 2024, with the lion's share of it likely to fall in 2025's cash flow. Secondly, and as flagged in December, a goodwill impairment in our legacy North American automotive and industrial business. This reflected the challenging end market environment in these areas. And finally, the GBP 28.4 million ERP program write-off, which you'll recall from the first half results, it's an unchanged number from them when we took the decision to stop the rollout of our SAP operations module. The group delivered strong cash flow in 2024 with adjusted headline operating cash flow of GBP 115.5 million, that's up GBP 3.3 million year-over-year and it represented a conversion ratio of 90%, right at the top end of our target range of 80% to 90%. You can see here, EBITDA was broadly stable on the prior year. Net CapEx was lower at GBP 60.5 million. That really reflected the phasing of project spend with CapEx expected to increase quite materially this year. There was a higher level of provision outflow driven by a one-off payment to resolve the legacy U.S. environmental matter. Working capital again was carefully controlled and remains a focus area. And as flagged in the guidance we provided in March last year, cash tax was significantly higher, reflecting a nonrepeat of a refund on U.S. tax that had benefited 2023's cash tax number. Put it all together and as a result of this and also after the restructuring cash spend start, our free cash flow, GBP 70.6 million. Following that cash performance and progress with the share buyback program and the dividend payment that we've made in the second half, net debt, excluding lease liabilities, ended the year at GBP 68.3 million. Leverage remains low at around 0.3x net debt to EBITDA and the balance sheet is in good shape, which gives us plenty of optionality for the future. We continue to take a balanced and measured approach to capital allocation, and 2024 very much saw that play out in the actions we took, which you can kind of see in the boxes on the bottom. CapEx, GBP 60.5 million as we invested to support growth and maintain our existing asset base. It was a further year on delivering progress in our dividend track record, with GBP 42.8 million paid out to shareholders. We completed in January 2024, the acquisition of Lake City, which has been a very positive addition to our Specialist Technologies business. Finally, we returned almost GBP 58 million to shareholders through the share buyback program with a further GBP 30 million extension to that program now underway. And going forward, we will maintain this same balanced and disciplined approach to capital allocation. With a balance sheet that's in strong shape to enable us to support the ongoing growth of the business and drive shareholder value. Now undoubtedly, the highlight of your Friday morning, the technical guidance slide [indiscernible]. A little bit of detail here just around some of the more specific modeling points for you to take into consideration as you think about 2025. Firstly, FX. Rates have been fluctuating a lot recently, as I'm sure you've seen, but if today's rates are maintained, that would see a further small modest headwind to revenue and profit this year, about GBP 1 million to profit potentially. CapEx, we expect to normalize back to around GBP 85 million as some of the phasing of project spend that we saw in 2024, we see the other side of that in 2025. And as we continue to invest to grow the business and fund some of the initiatives that Jim will take you through in a moment to drive our growth in Specialist Technologies in particular, and focused growth in Precision Heat Treatment. Share-based incentive payment costs will likely normalize in 2025 after having been a lower-than-normal level in 2024, potentially increasing by GBP 4 million or so. And finally, P&L tax rate will continue to modestly increase to around 24.5%. With that, I'll hand back now to Jim to cover the update on strategy and also to take you through our outlook.

Thank you, Ben. The recent capital markets event, we outlined our strategy of creating 2 strong platforms anchored around our key strengths. Firstly, Specialist Technologies, which, to remind you, consists of 3 highly differentiated businesses, S3P HIP surface treatment, and we are the global leader in 2 of them. We maximize growth here by expanding our addressable market every day through finding new engineering applications where we bring a better engineering solution. Precision Heat Treatment, we are the clear market leader. We have deep accreditations and are embedded in the supply chain of the majority -- sorry, we are embedded in the vast majority of our customers' supply chain. Our focus here is to improve the quality and also the performance of the business by problem-solving material issues for our customers every day through our global network of metallurgists as well as improving productivity in our plants. We have 3 strategic levers that will drive progress in the company, and optimize, which is all about enhancing the quality of the portfolio. Perform, which is about identifying areas for performance excellence and also driving internal best practice. And grow, which is about identifying and being absolutely focused on growth and improving our overall business mix. Looking at the progress of our 3 strategic levers, we've made early headway in all 3 and especially in optimize where we are in the full execution phase. We are well on track to deliver targeted savings in '25 from a mixture of overhead savings and plant consolidations. We will then deliver GBP 12 million to GBP 14 million through run rate benefits by the end of '26. In perform, we are just coming out of the pilot phase for the heat framework and getting ready for a full rollout across our network. Around 10% of our sites are in this pilot program. And from this work, we've dozens of new examples of best practice and process innovation that we will share across our huge network. Full rollout will commence this year with the benefits set to start coming through materially in '26 and beyond. Then on the growth side, we've now a clear growth framework for how we are approaching growth. We've already made some capital allocation decisions. And now we are looking at CapEx projects, customer sustainability actions and commercial excellence to drive future growth. This slide details the Optimize program, which we set out at our recent Capital Markets event. I'm very happy with the progress. We're about 1/3 of the way through the overhead reduction program and the closures and consolidations of the target sites. And this year, we'll see low single-digit million pound profit benefit, and we will have laid the groundwork for the full year run rate by the end of '26. And I'd like to bring this to life, and this is a real-life example in the Midwest U.S. So we're taking 3 sites at consolidating them into one. And we're also retaining a good portion of the revenue. Some sales we don't want to retain, so the work is more commoditized, it's more higher carbon. It's actually less attractively priced. We are working with our customers to manage to offload this activity. But it's clear to see some of the benefits. 40% of sales retained at now a good drop-through margin as well as improved utilization profit uplift and an energy intensity reduction of 40%. You'll recall that HEAT is our operator -- sorry, you'll recall, HEAT is our internal operational framework, which will help us deliver evolution at pace. And it will apply to all of our businesses, and that's the fix, nurture and grow areas of the portfolio. We have sub-measures for each area. But we will also measure against better customer experience, improved employee engagement and higher margin and growth. H is about driving a performance culture, our new CHRO has already hit the ground running and is driving progress. It will start to look at barriers and frustrations within the organization that gets in the way of high performance. E stands for enhanced service quality. This is about ensuring that we deliver the best customer service and experience. A stands for agile cost base, it's our core capability now. The business has good ways of working to make the cost base as variable as possible, and I think we demonstrated that in '24. And T is about being a sustainability leader. So as we report in the future, we'll dive into different elements of the framework to keep you updated on our progress. And this time around, I want to focus on 2 elements, the E and the T. So E of the HEAT is about driving consistent service quality where, frankly, today, our record is variable in some of our key service metrics. There's been a huge amount of work testing and deploying lean management into our organization. As I said, we're now piloting in just over 10% of plants, and we're beginning to see the fruits of these efforts. Driving operational efficiency is our core capability for me. I have many years of experience successfully implementing lean programs across the previous businesses. And I have to say, based on my experience, I couldn't be happier at the results we are seeing from these pilot sites both in the U.S. and also Europe, there's a real potential to unlock here. An example, I visited the Camas HIP plant, which is based in Portland, Oregon, just to see progress firsthand. And what the team's done there is they've mapped out the whole process and the facility, removed all the waiting time waste and error-proofed the working area. That's actually called poka-yoke, not a joke. They've done that over several months. And from this, we decreased our average turnaround time by 2/3 and improved our cost of quality by over 90%, and that's only 1 action in 1 plant. So that really demonstrates the real power of our focus business system. This year, we'll make another step change in the deployment of productivity actions, including better operational efficiency and a more flexible labor utilization. And our new Chief Excellence Officer starts on the 1st of June. So in our business, it's all the 1% added up over time that will make a massive impact in terms of customer service margins and growth. Turning to sustainability. We're all very proud of the CO2 reduction of 6% last year. This is a combination of improving furnace efficiency, removal of high carbon processes and looking at site energy efficiency, which would include heating and lighting. We've set a new SBI target -- sorry, SBTi target at the end of last year, which is a 46% reduction to 2019 levels by 2030. And again, progress is all about many actions. One of the examples here on the slide is an Derby site in the U.K. where we installed an adiabatic cooling system. This is a more efficient closed-loop system to cool the furnaces. The benefits are really huge. A 15% reduction in site electricity use, therefore, a sizable annual cost savings with a payback of under 2 years. So we've now installed 8 of these systems in the last 2 years. So we'll continue to demonstrate leadership and sustainability, both internally and externally with our customers and investors. Moving to growth. Our focus on driving growth is on 3 key dimensions: end market processes and geography. And our capital markets event last year stated that around 65% of our sales are currently exposed to these attractive areas. The aim in the medium term is to move this close to 75%. We will pursue these -- sorry, we will pursue growth in these areas through a mixture of organic and selective inorganic investment. We've already gone through our funnel of capital projects and have prioritized them based on strategic alignment to these 3 dimensions and financial returns and risk. And as you can see, we're modernizing a number of aerospace facilities in the U.S., and we're expanding our HIP capacity, both the U.S. and also in Europe, and we're increasing our footprint in Turkey and China. These are deliberate actions. And on top of these CapEx investments, our growth will be through selective M&A, a fundamental improvement in our commercial capability and through the growth potential we see through our sustainability actions. And we'll talk more about these elements and future results. So turning to outlook. Obviously, the market environment is mixed. The soft demand we saw, most notably in automotive and industrial has continued into this year. In Aerospace & Defense, the underlying demand remains very positive. But there are some temporary headwinds from supply chain challenges. We expect those to ease through the year. There is also additional macro uncertainty at the moment, as you're all aware, just around tariffs and trade. We are fortunate in that -- in our business model, it's a truly vocal-for-local business model. And as a result, there should be minimal direct impact from any tariffs. Our aim overall is to stay flexible, to stay close to our customers and work to support them whenever they need our services globally. So reflecting this backdrop, our current profit run rate is broadly similar to the second half of last year. We're successfully executing our self-help actions at pace, and as we go through the year, we will see a growing benefit from these actions. Our focus is controlling what we can control, delivering on costs and delivering on our optimization program. And as we do this, the business will be positioned well to capitalize on the recovery whenever it comes. We are absolutely confident in the delivery of our medium-term targets. A huge amount of the journey to these targets is within our control. So there's lots to be done. And I'm looking forward to coming back in due course to tell you about our progress. And with that, I'll open it up to questions. For those that are online, please submit any questions through the online link. Thank you. We'll start with Andy.

On Slide 26, you talk about the growth strategy and a lot of it is focusing on organic investments, which I think you talked about previously. Can you just refer to the comment you made on inorganic? Clearly, we've got a share buyback ongoing, which will take a couple of months to do. What's the thought process with regards to M&A? Or should we be thinking more of share buybacks? And kind of what is the opportunity set do you see for M&A?

Yes. For M&A, I mean, last year, obviously, we did the Lake City acquisition in January last year. It's completely met expectations. I visited there in the summer last year and the focus on customer service has just been totally obvious. It's one of our best sites in the network. So that was a very targeted and selective acquisition. We'd love to do more Lake Citys, and we are actually -- so we don't have any near-term active acquisitions. We do -- we are actually building our funnel of acquisition opportunities. And then they will be targeted, focused in high quality, just like Lake City, if we decide to go forward. But we don't have anything in the near future. But it will be part of the Bodycote growth story in a disciplined capital way.

Are they more bolt-on? Or do we have transformational M&A in that potential funnel?

I think our funnel at the moment is actually more around bolt-on. And it looks to the 3 dimensions that we talked about, I mean end market -- good end market areas, which would be aerospace, energy, medical, processes. It's likely acquisitions will be more in Specialist Technologies. And obviously, end market, there may be opportunities -- sorry, geography, there may be kind of geographical opportunities. So I think as we go through this year, we're building, we're working that funnel, but we will stay disciplined, but it will be part of the Bodycote growth story.

And just a couple on end markets. Can you talk through A&D and what you're seeing there? Clearly, a tough back end of the year, but we know about all the challenges we've had. Can you just confirm that the recovery is coming back as we are hearing from other people; clearly, supply chain constrained. But hopefully, we're coming back and then should improve into the second half. And then a cracking job in auto last year outperforming the underlying markets. Is that something that you can see continuing into '25? It will be helpful on those, please.

So in auto, obviously, we're very proud of the growth that we saw in our automotive market. We were up 2%. If you look at light vehicle production globally, it was actually down 1%. So why is that? Well, I mean, we really had some bright spots in China, especially China and also Mexico. In China, we actually rebooted the whole business. We changed the local management there. We invested in new local sales teams. And also, we pivoted the business from really focusing on international OEMs to the domestic OEMs. And that's actually had a massive benefit second half of last year and also this year, they're really powering ahead. So that is a bright spot for us. Mexico also had a great year. They had some good wins in terms of new platforms that have been focusing on, primarily around steering and around e-brakes, believe it or not. So that's been their focus. And obviously, that offset weakness in North America and especially in Europe. I would also point out that the vast, vast majority of our optimization program is focused on automotive and general industrial. So we're trying to -- we're focused on trying to do the right things and trying to read the market for the next 5 years.

Yes. Should I pick up on the aerospace question. So yes, I mean, for 2024 overall, we were not displeased with the growth in aerospace. It was up 9%, which we still think was a pretty good performance. I'm sure you've backed out and done your math, you will pull out from that, that actually November, December were fairly weak for aerospace. And the issue there that you all just need to understand is how a number of our customers and their customers in the wider supply chain were quite aggressively managing aerospace inventory through November, December. By its very nature, that's a short-lived year-end effect, right? So we've rolled into this year. And some of those supply chain constraint effects are absolutely still there, and those will take some time to burn through. Probably Q1 is likely to still remain fairly tricky in terms of some of those supply chain issues. But absolutely, they should ease as we go through the course of the year. And the fundamental demand environment in Aerospace remains extremely robust. You've got joint 15,000 aircraft backlogs for Airbus and Boeing, 10 years of production, strong air traffic growth, customers who would love to have more aircraft more quickly. The key challenge remains Airbus and Boeing and their ability to produce and their ability to convince their suppliers to produce. We've got the capacity, and we're ready for when that pickup comes.

And one just quick one. Any more improved pricing on Surface Tech that you talked through last year? Does that flow into this year? Or are we are not -- all done now?

That's pretty much -- that's all done. I mean the benefit from that improved pricing you saw in '24. And that doesn't mean it goes away. It just means that's the new base point as we go forward.

Stephan Klepp from HSBC. I have a few as well. So continuing probably with the end markets and then as well with the exit rates, what kind of phasing should we expect? You said run rate is going to be around H2 levels of 62. But then if you think about first half where auto was not too bad as well aerospace was obviously not too bad either, what should we expect in terms of execution? And in terms of profitability and probably then as well talking about how do you see the evolution of your top line? You didn't comment on that at all. So it would be nice to hear what you think about that. And lastly, can we talk about free cash flow? So there's a couple of items that we're going to expect this year and CapEx will pick up again. So where do you see free cash flow ending? And will that impact your ability on doing either M&A or probably more share buybacks?

Do you want to start, Ben?

Yes, why don't I pick up on those points? So phasing, it is going to be very different to last year. I mean, as you saw last year, we delivered GBP 66.8 million of profit in the first half, GBP 62.2 million in the second half, reflective of what was going on in the end market environment, which saw a significant shift H1 to H2. As we go through this year, we've given you the sort of high-level view as to where the current run rate level of profitability is that enables you to build a picture. As we go through this year, the affects you need to take into consideration are, firstly, the element that was in our control, and that is driving the progress on the optimization program, the benefits of which will be very second half weighted. So full year, low to mid-single-digit benefit, very second half loaded. That inevitably will build you into a picture where the second half has to be higher than the first half in terms of profit for that effect. And then there's a secondary effect, which we're not going to call we're managing the things we're controlling, and we're managing them harder on costs, and we'll continue to do that. But the secondary effect is your views on where you think markets are going to go in the second half versus the first half. You're far brighter than I'm, Stephan. So I'll leave that up to you to call the view on that one. But those are the affects you need to take into consideration on the H1, H2 phasing as we look to the year. On free cash flow, and so let's start up a little bit further up the cash flow statement. Headline operating cash flow likely to be a little bit lower than it was in 2024. You've got a few puts and takes, first of which is CapEx, as you saw from our guidance, maybe GBP 20 million, GBP 25 million higher. Admittedly, that provision outflow that we had roughly GBP 5 million, GBP 6 million in 2024 doesn't repeat. So there, headline operating cash flow will be lower, not by quite the full amount of CapEx, but will be a little bit lower. As you move down towards free cash flow, you're right, the majority of that GBP 25 million to GBP 30 million cash restructuring spend, we saw about GBP 4 million of it, didn't we in 2024. The majority of the remainder falls in 2025. So you need to take that into consideration. So it does mean that as a year, 2025, largely driven by the restructuring spend, free cash flow will be lower than our normalized type of run rate before it then picks up again in 2026 as the restructuring cash cost headwinds disappear. Does it impact our ability to do share buybacks, M&A? I mean, mathematically, it does modestly, of course. But the group has 0.3x net debt to EBITDA in terms of leverage. We've got a very comfortable balance sheet. We've said we're happy operating in a 0.5 to 1.5 net debt-EBITDA range. Our covenants allow us to go to 3, but we don't want to push things quite that [ gracefully ]. So there is, of course, some modest mathematical effect, but we've got plenty of headroom with the leverage where it is today to be able to take some sensible choices about capital deployment, take opportunities that may arise on M&A, deploy in different ways as we see best fit to drive value and manage risk reward.

I'm Mark Fielding from RBC. I've got 3 questions actually quite unrelated, so maybe I'll take them one at a time. That might be easier. First one on my favorite slide, the technical guidance slide. Obviously, you're picking out the increase in share-based payments, which is a sort of GBP 2.5 million to GBP 4.5 million headwind in the year. I'm just curious in the context of that, we're going on at the second half run rate type comment, where does that fit in the bridge, if you know what I mean? Like what's this compensating for that headwind in that commentary? And maybe just is there anything on phasing in that as well, first half, second half?

Yes. So on that one, I wouldn't expect there to be significant phasing around that one. We generally accrue for it at a fairly consistent rate during the year. And then you kind of -- the natural accounting is you sort of true it up at the end of the year dependent on exactly where the outcome has landed for the current year. So with the best one in the world, you try to flat accrue it, you never quite get it right because you don't know exactly where you're going to land on. But I wouldn't say there's a significant phasing effect to that. It is a headwind, you're right. That headwind has been factored into our picture that we painted around the level of run rate profitability. So it's not incremental to that. It is embedded within that.

Following that, I'm a bit curious. Is that, that actually there is a bit of improvement in certain profit areas? Because obviously, your cost savings number is quite distinct, so they're not offsetting it. So I'm just a little bit curious what's the offset in the balance of numbers versus the run rate in the second half.

So there's clearly a lot of moving pieces within it, and you're talking about an order of magnitude that is a sort of GBP 2 million to GBP 4 million effect. So if -- by the time you divided that by GBP 12 million to turn it into a run rate, it's kind of noise around the edges and I think it is captured within the word broadly. So I think, yes -- there's a number of effects in there, some positive, some negative.

That's fine. And then separately, in terms of you were pulling out for Specialty Technologies, you just mentioned the energy project business, obviously working to fill that in. I suppose I'm more curious generally, I mean, a, on the scale of that, I mean, it looks like energy is around GBP 50 million of revenues for Specialist Technology. Is the project business accountable for all the growth? Or is it, say, GBP 10 million or so of revenue? And I'm just more generally curious if that kind of project business is quite common, how regularly you get those sorts of things through.

I'll take that bit. So the energy business is actually slightly more than the number that you see. And it's really made up of 2 kind of core drivers. The first one is kind of IGT, industrial gas turbine, business, which is separate from the oil and gas business, which we're talking about the project. It's actually going great guns. We just won a big order in the U.S. in terms of IGT, and that will play out through '25. We see that as actually strong growth within energy this year. The challenge is in oil and gas. So the project you referenced, it was a 2-year -- it was a project that revenued over 2 years. I think the impact to '24 is in low single-digit millions in terms of profitability. So that is a headwind for us. Now, by their nature, these projects are very lumpy. Ideally, you'd have them flowing right after the other. So the good thing is that because we did that well -- project well, it's become a bit of a reference and, actually, we're bidding more work. And we're hopeful soon we're going to win other projects kind of related to the technology that we're working on in the Middle East and, hopefully, get some benefit this year kind of from that. So most of the energy projects are fairly lumpy, but this is quite an unusual size for us. So that is the reason that we called it out.

And then finally, just in terms of obviously, highlighting the very good CO2 reduction and the work you're doing to reduce energy, I suppose in that context, just curious about where we are in terms of group energy costs. Just how we see that evolving. And I know there's a lot of other moving parts with energy prices and things. And so just your general thoughts on how that world evolves and how your actions fit into it?

Yes. I mean -- so why don't we start with the overall sustainability. I mean sustainability for us works on multiple levels. It's been about a kind of industry leader within our -- sorry, a leader within our industry where we set the example in terms of CO2 reduction. There's no one else in our industry set these targets or has been as open and forward as actually we are, which I think is actually good. But also, it's becoming an avenue for revenue growth. Lily and our team are out constantly visiting customers, showing them the benefits of transferring some of their heat treatment to our lower carbon processes and ways that we can do it more efficiently than they can do it in-house. So I think as a strategy, it's kind of more than just energy cost, but that's an important kind of part of it. And I think we talked at the Capital Markets Day, we had an example from a European engine manufacturer. We've got multiple discussions with global names at the moment around taking some of their business from in-source to outsource. So energy cost is obviously part of that. We've got a program over the next 18 months looking at kind of net zero and how we think about green energy within our company that we're progressing. And also later this month, Lily and her team are actually launching a program called Carbon Smart. This is an exclusive actually, I guess, to this audience. We're launching an internal program called Carbon Smart, Bodycote Carbon Smart, which has got kind of 2 areas. It's got the internal area where we train our sales teams, how we narrate proposals and how we become a thought leader within the industry. And it's also the commercial side of things, getting out in front of customers and trying to convince them. And part of that, if you think a global manufacturer wouldn't outsource anything other than to someone who's got a green energy credential, so that's the way we're going. So we monitor energy costs. It's part of the operational reviews every month. And we're looking at alternative suppliers. We talked about adiabatic cooling as one, so we're continually looking at that.

Excuse me, it's Friday. Harry Philips at Peel Hunt. Just a couple of questions, please. Just on the fixed bit of the chart of the Capital Markets Day, obviously, we talked about the sort of noncore bit and we've talked about the core bit, but you had that little square of fixed. Just maybe an update on how that's evolving and is more going to slip into noncore and other into core?

Yes. I mean, let me be perfectly frank. When we assessed summer last year, we assessed the whole business and 1/3 of our portfolio needed to be fixed or closed. It was that order. So that's quite a significant number of plans. So subsequently, okay, we looked at what kind of goes in the close and what goes in the fixed. And all of these plants, okay, that are in the 1/3 of the portfolio that we deem kind of intervention, we've got fixed plans for that. And these are ongoing. I'm very happy with progress. We've got -- I think one of the things I'm most proud of is the fact that we've engaged our team along the strategy that we presented at the Capital Markets event and all the presidents, the vice presidents are all working together just around fixed. So there's quite a lot of fixed activity going on, and that will come through in growth and through margins kind of through time. The other 2/3 of the portfolio, always Spec Tech is in the other 2/3. But that's about nurturing. That's about supporting, provoking, kind of nurturing the portfolio so they bring in best practice. I think I mentioned this at the Capital Markets Day that some of your best opportunities are in your best kind of plants because they're -- because the pricing is good, you can get away with a lot of stuff, so that's where we are with that.

And then just secondly, on the M&A environment and, obviously, your immediate sort of competition, obvious competition are becoming more pure play, more focused, really sort of honing in. One of them obviously did a reasonable sized deal Christmas time and things like that. So you've got more competition seemingly coming into that segment and Bodycote has never been the sort of busy acquirer. I mean, obviously, you did Lake City, did Ellison back in '20. You don't have to go back quite a long time for other deals. So just that broader capital allocation and Ben touched upon it in passing to an earlier question, you've got about 0.5 to 1.5. And even on my numbers, you may get to 0.5, 0.6 leverage this year, say. And then you get back into your normal cycle ex the restructuring. You're going to be net cash in 2, 3 years' time easily if you don't do a deal or whatever whole...

Yes, I appreciate that.

Sort of how -- I mean, obviously, M&A is serious, but the track record suggests it's sort of opportunistic at best. And...

Yes. Let me give some kind of perspectives on that. I mean the first thing is, so any deals that you read about in the press, okay, we've already looked at. And so that isn't any surprise. And we take a considered view. I think we said -- I said at the beginning, all deals going forward, okay, would be targeted and focused, selective and also high-quality businesses. We're not going to go and buy many sites and businesses that is in the traditional heat treatment. We're just not going to do that going forward. So that probably brings down the landscape a little bit. But I would also say that we -- I think, it's fair to characterize that Bodycote was opportunistic. We certainly didn't have a proper M&A process in place for really identifying and building relationships with potential future opportunities. Of course, we know the industry, we know people, but the proactiveness wasn't as there as I would have thought it was, to be perfectly honest. That's actually changing as we speak. We have got -- we are building a very, very good, focused, selective targeted funnel that we will look to nurture this year and beyond. And just to reiterate, Ben can comment again on the capital allocation. I see M&A as being very much part of the Bodycote growth story in the medium to long term.

And just to maybe add to, I guess, your question, Harry, was alluding to one of [ Albert's ] recent acquisitions in the U.S. We did look at that business. It brought nothing to Bodycote that we didn't have already. We chose not to participate in that process. There was one plant, one part of it that potentially was interesting, had 1 HIP vessel, small. Remember, in those areas we want to grow, competitors may be doing small things like this. But in HIP, we've got 4x the installed capacity of our -- of the next player. In S3P, we've got 5 to 7x the revenue of the next player. In Surface Technology, we are the #2 player globally. So yes, there are some sort of bits of noise going around the edges. That particular transaction has not moved the needle on any form of competitive dynamic or pressure. And it didn't fit with what we wanted, which back to Jim's comments, it's about targeted acquisitions. It's about targeted organic investment in the areas we want, in the processes we want, in the geographies we want, with the customers we want. Things that have a smallest board of auto or industrial exposure in Europe or North America, you shouldn't expect to see us investing or buying in those particular areas.

I'll go next. Tom from Deutsche Numis. Probably 2 areas for me. I think, firstly, can you give a sense of where sort of your -- in the Industrial business, where kind of your utilization rates really are? Just trying to get a sense of that magnitude and what sort of gearing to the recovery and if there's anything you'd call out as part of that recovery? And then secondly, around Specialist Technologies, obviously, the statement you called out the market share gains that have helped you deliver that 5% organic improvement for the year. Just, I guess, the extent that contributed to that and how that goes forward and the shape of that looking for 2025?

Let me answer the Spec Tech, Ben can look at the utilization rates. So in terms of Spec Tech, overall, I mean, last year was a good year for us, 5% growth in the year. And obviously, our target of high single digit is a through-cycle target. And we are -- I mean, the quality of these businesses, we're absolutely confident in that medium-term through-cycle target. I think the work we're doing is we're working hard to intentionally expand all 3 of the businesses. So on the slide, I talked to S3P. We're -- now the Board have been very supportive. We're going to expand there in Asia, which is a new thing that wouldn't have even been considered before. I think that's very important. In HIP, Ben talked about our market position. We have got 2 new expansion projects that we will progress this year and also next year. And we've been quite creative in the ways that we're going to shorten these installs so that we can build revenue from that. And in surface heat treatment, I was over in the U.S., in January I actually visited one of our plants at Hebron. They do a lot of kind of gas turbine work. And from that visit, we agreed to expand the building because that -- they needed kind of space to grow. And that building had been through several lean assessments if we could do more in the building, and you can imagine that, but we're not -- we're going to expand the building. So our focus in Spec Tech is actually really about supporting and expanding the premium revenues we have actually from that. That being said, the business isn't independent of the macroeconomic environment we face. But we'll always put our best foot forward for that division because as an engineer, going and see these businesses as premium engineering, and we will support that going forward.

Yes, should I pick up on the one on utilization around industrial, just looking at industrial plant utilization. And there's always a bit of noise looking through it, as you'll appreciate because you typically have plants. We have plants that are not pure play, this is an industrial plant or this is an automotive plant. Often, they're co-mingled. The other piece, level set, remember, utilization, 85% is essentially your maximum because you're always going to have some degree of utilization capacity to cater for downtime maintenance. So 85 is the new 100. Where are we today? We're probably around about 55% utilization for our industrial and our automotive focused plants globally. Now within that, that is an average. There will be some where they are much higher, particularly in the areas where we have been investing in Precision Heat Treatment. So for example, China, Turkey, where we've added new plants. Mexico, which is actually only a small part of the business, but running at full capacity. Utilization there is actually 85% or so. So the picture does vary globally, but overall, it's about 55%. But that also highlights some of the positive opportunity as those volumes come back. The final point to say as well is that is utilization measured on an asset utilization perspective. That doesn't mean we haven't managed headcount, which is like 45%, 50% of our cost base to say we've got 45% of people sitting around doing nothing, but that's looked at through the asset utilization lens. And essentially, what it means is in a number of these plants where you have multiple furnaces, there's 2 or 3 of them that at the moment are constantly sitting idle, not being operated. But similarly, you've managed your labor cost accordingly in those sites.

Just actually one follow-on point that came up a few weeks ago. We've -- and obviously, tariffs, no one really knows, I mean the situation changes by the hour, I think. We have -- we can flex our capacity in North America to suit the tariff situation within that country. We've only a couple of plants in Mexico, a couple of plants in Canada. The majority of our plants are actually in the U.S. So again, back the running at this utilization, so the opportunity for us, it shows the flex availability in this business, both up and down, is actually very strong. Neil, I think you had a question?

It's Jonathan Hurn from Barclays. Just 2 questions. Hopefully, quite quick questions. First one was just within -- on HIP within Specialist Technology. Obviously, you called out the better operational performance contributing to that margin increase. Can you just give us a feel of that 300 basis points, how much came from that operational improvement? And as we look into 2025, what contribution can we continue to see for that to the Specialist Technologies margin? And then the second question was just kind of following on from the last. I just wondered if you could sort of give us a little bit more color about those or the industrial sector. Obviously, there's a catch here. Lots of different end markets. Can you just give us a feel for the various trends we're seeing? Are any of them inflecting in any way within Industrial?

You want to take the first question. I'll take the second.

So of that 300 basis points, around about 100 basis points of that came from improved execution. It actually broke down fairly -- the genuine math, it broke down fairly evenly between about 100 basis points was from the improved volumes, about 100 basis points was the improved execution predominantly in operational efficiency surrounding the HIP. And there was a sort of 60, 70 basis point impact positively from the contribution of the consolidation of Lake City and its higher margins. Look, as we go forward, there is further opportunity to go for absolutely in terms of the margins in Specialist Technology and further to go for in terms of our operational execution. We're working and driving through that path. And one of the plants that Jim put on the screen, which I think was of Camas, wasn't it, which is in the Pacific Northwest, one of our big HIP facilities. That's one of the ones that actually not solely, but contributed to that benefit. But there's more to go for even in those plants and in other of our Specialist Technology plants. So our confidence of achieving margins in Specialist Technology of more than 30% by 2028 very much remains. And that's, of course, one of the legs of the overall confidence we have in getting group margins to more than 20% by 2028.

In terms of your second question, I mean industrial markets in the presentation was down at 6% as that was in an early slide. As you can imagine, it's made up of dozens and dozens of markets. I think trying to call this out this year, I think, is going to be very difficult. There was a couple of bright spots in our industrial markets last year. That was in mining and tooling, where we saw kind of good growth. All the other general industrial markets, I think, were down. It's going to be difficult to predict what's going to happen this year. Again, we're back to what Ben was talking about earlier, managing our utilization, managing our flexibility, control what we can control. We did a good job at that last year. So it's going to be the same strategy going forward about how we manage our downside gearing and things like that. That's -- we look at this every day, how we're looking at plants and how we're thinking about it. So that -- so you can be safe in that kind of regard.

I'll maybe pick up with 1 from the web. We've had a few come in, so thanks for that. We're a bit low on time. So the ones we don't ask, I'll get back to you on e-mail. But yes, one we had come in was how will Bodycote be affected by the potential of higher defense spending in Europe that's been talked about a lot in recent weeks?

Yes, that's a good question. We've actually read and heard some of our kind of customers in some of the industries like in Germany, potentially re-badging, moving to new defense kind of opportunities. We have the potential in our network to pivot to where our customers are going. And we see big opportunity like, for example, we don't do much aerospace work in Germany. And that's a matter of the way that we're structured and probably a bit of lack of flexibility. So -- but we have the capability to do that. So as things pivot, we'll keep close to our customers, understand where the market is going and respond accordingly. Any more questions in the room? No. I'd like to thank you all for coming on a Friday morning. Enjoy your weekend, and thanks for your support. Thank you.