Bodycote plc ($BOY)

Good morning, everyone. And thanks for joining us today for the 2025 Bodycote full year results. I'm Jim Fairbairn, CEO; and with me is our CFO, Ben Fidler. And I'm going to give some brief introductory remarks and that will set the context and give some highlights. I'll then pass to Ben to go deeper into the financials. And I'll then come back and talk about the important progress that we've made on the strategy and how we're positioned and how we see the outlook. So you'll remember, we set out to firstly build a quality extended leadership team; secondly, significantly reposition and restructure the business; and thirdly, deploy from our Capital Markets Day, which, as you'll recall, was focused on optimizing the quality of our business, performance and growth. And in conditions which were challenging in some of our end markets, we've delivered a significant amount last year. In terms of the highlights, revenue momentum improved in the second half, more of that in a second. And the most important to me is the quality of the portfolio. We've been executing at pace. We've sold 10 sites in France and closed a further 8 sites and also made a strategic aerospace acquisition on the East Coast of the U.S. This is a first sign of a more bolt-on acquisitions to come. And on top of that, our balance sheet remains healthy. Today, we're able to announce a further GBP 80 million buyback that we expect to complete by the end of 2027. So all of that puts us in a position for 2026, where we expect to drive core organic growth, margin growth and further drive the strategy for the medium term. And as we flagged last year, we saw improved momentum in the second half, and that was primarily led by aerospace. Core revenue, although flat for the year, was up 3% in the second half. In Aerospace & Defense, growth accelerated throughout the year, and it was up 14% in the second half. We saw good growth in Aero HIP and in engine parts. And Industrial and Automotive both remained challenging. Both improved in the second half, but were modestly down year-on-year. North America was more resilient in auto, but softened in industrial later in the year. And Europe was the opposite, weak in auto all year, but the comps became easier in industrial. In Energy, we saw a significant decrease in available oil and gas work as well as customer-driven project delays. And this has led to around a 25% reduction in revenues. Industrial gas turbines, on the other hand, was up 6%, and we expect further strong order growth this year. So despite that backdrop, there is a really important point that I want to emphasize. And what we've done and are continuing to do is to increase the quality of the portfolio. We are laser-focused through a combination of targeted organic investment and also bolt-on acquisitions as well as closures and disposals through the Optimise program. And the chart on the left shows that it will take Spec Tech from around 1/4 to around 1/3 of the portfolio post Optimise. Further growth focus is in all 3 of the technologies through organic capacity investment and also regional expansion. And our target is to get Spec Tech to 35% to 40% by the end of 2028. And on the right, the chart shows our faster growth markets. These include Aerospace & Defense, Medical, IGT. This will reach 45% post Optimise, and we expect these markets to become the majority of the portfolio by 2028. This stronger foundation gives us the confidence for this year and also the medium term. I'll talk more about this later. With that, I'll pass to Ben.

Well, thank you, Jim. And just to add my welcome to Jim, thanks for joining us this morning. I'm now going to spend a little bit more time stepping through in some more detail the key elements of our financial performance for 2025 and also touch on some of the more specific points about our 2026 guidance and outlook. So let's start on this slide with the key highlights of the numbers. As you heard from Jim, in mixed end markets, we delivered broadly stable core revenues for the year, down 0.3% organically. As Jim outlined, though, we did see a much stronger level of organic revenue momentum in the second half of the year than we did in the first half. Core margins, you can see here, down 160 basis points to 16.8%, but still a good level. Again, a decent improvement in margins in the second half compared to the first half. Reflecting the lower operating profit and the higher tax rate, EPS fell to 44.4p. Cash conversion remained very healthy at 78% despite a significant increase in the amount of CapEx compared to 2024. And finally, the balance sheet remains in good shape with leverage close to the lower end of our target range, leverage at 0.6x at the end of December, whilst having returned GBP 100 million to shareholders through a combination of circa GBP 40 million in dividends and GBP 60 million in share buyback. Now, diving into the numbers in a little bit more detail for you. Firstly, focusing on the ongoing core business. Core revenues, you can see in the top table here, broadly stable, down 0.3% organic. And that reflected a modest fall in volumes, offset partially by increased pricing. Reflecting the market environment, along with mix headwinds, core operating profit fell by 8.5% to GBP 113 million. That's that margin of 16.8% we saw on the last slide. And secondly, in the lower table, if you look through the group lens, so including those non-core activities in the non-core division, revenues were GBP 727 million, down just over 2% organically. Group operating profit, GBP 114.3 million, which equates to a margin of 15.7%, down 130 basis points. Adjusted EPS, down 8.6% to 44.4p. A few dynamics going into that. Clearly, number one, the lower level of operating profit, modestly higher financing costs as leverage went up and an increase in tax rate. Of course, those were partially offset by the lower share count from the share buyback execution. Despite the lower EPS, full year dividend was held at 23p, continuing our 38-year track record of maintaining or growing the group's dividend. Next, I want to look at a high level in terms of the key drivers of our operating profit performance in 2025. I'm going to cover the specifics behind the divisional detail on the next couple of slides, so I'll try not to duplicate. But as you can see here, Divisional profit fell a combined GBP 12.8 million. What was behind that? That reflected the lower oil and gas volumes in Specialist Technologies and the weak Industrial and Automotive environment, primarily in Precision Heat Treatment. Non-core profit, as you can see here, was GBP 2.2 million lower. That very much reflected just the execution as we closed sites and as we disposed of those French businesses in November. And we're now over halfway through the Optimise actions. That program is going really well. The benefits from Optimise ramped up in line with our expectation, and I think, in line with your expectations as well with GBP 4 million delivered in the year, mostly in the second half. We delivered about GBP 1 million in the first half. These benefits, where do you see them? You see them partly in the central costs on this chart, and you also see them buried within the Precision Heat Treatment divisional performance. They probably split roughly 50-50 between the 2. And finally, FX had just under GBP 2 million headwind to profit, primarily on movements on the euro and the U.S. dollar. Let's now delve into the performance of each of the 2 core divisions in a little bit more detail. So firstly, Specialist Technologies, where performance in 2025 very much reflected and was shaped by the weakness in the oil and gas markets, where revenues -- oil and gas revenues in Specialist Technologies were down 40%, impacted by the end of significant customer project work. This saw revenues in the division, you can see here, fall 3.7% to GBP 212 million. If you exclude that oil and gas effect, underlying Specialist Technologies revenue was up 2%. And trading momentum in this division was much improved in the second half, both in terms of revenue and in terms of operating margin. What drove that was very much led by Aerospace & Defense, which saw a significant acceleration in the second half and up almost 15% for the year in the Specialist Technologies division. Industrial and Auto, worth mentioning, they are much smaller parts of this division, but these were challenging markets in the year. Margins were lower, really impacted by the fall in the very high gross margin oil and gas project work that we experienced. But with margins at 27.1%, we think still at a very good level and clearly will improve from here, as we look forward. So looking forward to the 2026 for this division, we'll see a return to organic growth as the year-on-year oil and gas headwind abates. We expect continued good growth in Aerospace & Defense and industrial gas turbines. And as we also start to see some of the revenues on some of the new investments that we've been making over the last few years in Specialist Technologies ramp up. Next, turning to Precision Heat Treatment. On an organic basis, revenues were up 1.3% to GBP 459 million, with growing volumes of industrial gas turbine work within the Energy segment and accelerating growth in Aerospace also seen here in the second half of the year. As Jim mentioned earlier, Automotive and Industrial end markets remained challenging with some marked differences between the different geographies, Europe versus North America. Although comparators did ease as we went through the second half for both of those end markets. We took a number of actions to manage the cost base, but reflecting the weak industrial and auto market backdrop, margins in PHT fell by 150 basis points to 16%. Now, as we look forward to 2026, we do expect Precision Heat Treatment to capitalize on further good growth in Aerospace and good growth in Industrial Gas Turbines, although Auto and Industrial markets are probably likely to remain challenging. The group delivered robust cash flow with adjusted operating cash flow, you can see here, GBP 88.6 million. That was lower year-on-year, but that reduction reflected 2 real things. Firstly, the lower level of operating profit; and secondly, the increased level of capital expenditure, as we invest to drive growth in our target strategic end markets and our target strategic processes. Overall, operating cash conversion was still healthy at 78%. Restructuring spend, you can see here below the operating cash flow line, rose materially to just over GBP 14 million. That was expected and reflects the ongoing delivery and execution on the Optimise program. Now, of course, that number excludes the GBP 19 million of disposable proceeds on the sale of the French auto and industrial sites, which is reported below the free cash flow line. Put it all together, and overall, that left free cash flow at GBP 47.5 million with year-end net debt at GBP 105 million, leverage at a very comfortable level still. And that kind of leads us on to the next slide where what we've tried to do here is give you some more detail and a little bit of a broader picture as to how we think about capital allocation, how it fits with our strategy and how we have used it and will continue to use it to drive shareholder value. So let's move clockwise, start in the top right-hand corner. Firstly, the Optimise program, investing in the near term to deliver and execute on the program. It's progressing really well and is creating, no doubt about it, a better quality Bodycote. Additionally, it's also released some capital through that disposal of the French sites, which we then redeployed and recycled into other parts of the business that are more aligned with our go-forward strategy. Secondly, driving continuous improvement through the Perform program. You'll hear more from Jim on that shortly. It is starting to ramp up, and we've got a good level of confidence and conviction that, that will deliver meaningful financial benefits to the group over the next 3 to 5 years. Thirdly, we continue to invest selectively and with discipline to deliver the strategy, increasing the focus we have on our target strategic end markets, Aerospace, Industrial Gas Turbines, Medical and in Specialist Technologies and at the more differentiated end of Precision Heat Treatment. And that is going to be through a combination of organic growth as well as M&A and where we are building the pipeline nicely. And finally, shareholder returns, last but not least, a blend of regular dividends and additional shareholder returns as and when appropriate, with GBP 100 million returned to shareholders last year through this, and you've seen today a new GBP 80 million buyback program announced, all of which continues to be supported and enabled by Bodycote's strong balance sheet. We've got leverage headroom to allow us to execute on all of these priorities for capital allocation, and by using them all selectively and carefully to drive growth, improve the quality of Bodycote and deliver returns to shareholders. And finally, the long-awaited technical guidance slide. I know results season wouldn't be complete without it. Just a few points that I'll draw out from this as you build your models and build out your forecast for 2026. Firstly, FX. Based on current rates, probably a small positive impact on revenue, very little impact, probably no impact on profit. Secondly, for non-core, bear in mind, you've got the disposal of the French sites together with ongoing closures that mean non-core revenues are going to fall quite significantly in 2026. Thirdly, CapEx, we're going to continue to invest selectively and with discipline, but we will be investing more as we want to drive growth in those right areas of the business. And as we continue with the buyback, share count will reduce. You can see the numbers here, interest costs probably modestly increase. And finally, as I think many of you have already seen from some of our detailed guidance comments in the release, 2026 will be a year for a return to core organic revenue growth and margin expansion. But as you model margins, do bear in mind that variable pay could create a headwind of potentially up to 100 basis points in 2026 as this returns to more normalized levels after what has been a relatively low level in 2024 and in 2025. And with that, I'll hand back to Jim.

Thank you, Ben. In terms of the strategy, we are executing at pace, 2025 was an important year for milestones in all of the Optimise, Perform & Grow. So let me talk you through where we are. Optimise actions are increasingly behind us. We successfully carried out this major footprint rationalization, and it's already delivering financially and in line with expectations, as Ben said. We're dialing up focus on Perform & Grow. As you'll recall, Perform was actually designed to improve performance, productivity, customer experience and profitability. And it also improves the foundation for growth. I'm very pleased with the progress in 2025, and it's also great to see the teams so engaged in this area. With Grow, we are focused in multiple areas. Internally, we've increased our commercial capability and also resources. And we've realigned our market-facing business development areas to maximize customer opportunities. Additionally, we are investing significantly for future organic growth, mainly in the U.S. and Southeast Asia and in our most attractive end markets. So let me take you through each in more detail. With Optimise, I couldn't be happier with the approach and the execution of the team. You can see from the timeline, overhead reductions are almost complete. We're over halfway in terms of site consolidations, and we'll have exited 85% of those 21 sites by the end of the year. We have now a successful playbook for this activity, including ensuring we retain the revenues that we want if needed again. As Ben said, the financial cost saving benefit last year was around GBP 4 million. We expect around the same again this year in incremental benefit with a full run rate benefit of at least GBP 15 million by the end -- sorry, by the middle of next year. As I mentioned, around 10% of our sites in 2025 had some kind of a lean or productivity improvement pilot. Here's one example of the many pilot projects. This is our Hebron site in Cincinnati. It's a surface treatment site, and it does a lot of IGT work. They are growing, and they're also running out of space. So we completed a 4-day Kaizen event in Q4 last year. Kaizen events are very intensive short-term workshops that problem solve a specific process issue. In this case, it was the transportation of parts. Travel per week in parts was reduced by 5 miles. So this obviously meant a reduced lead time through less process crossovers, therefore, giving more capacity for growth. What you see on the chart is the before and after flow, and you see a far less complexity and an easier platform for growth. We also had observers from different sites there, and it's also created a momentum from the event where people -- so it's not created a pull factor for other sites. And I should actually reiterate that success in this area is hundreds of small incremental improvements that add up and you also develop a problem-solving muscle and you create a culture of continuous improvement. And from that, you drive productivity, differentiation, growth and also competitive advantage. It's a well-worn path. We've always had some elements of best practice within Bodycote. It just wasn't coordinated, and it certainly wasn't part of our culture. So on the left, you can see some elements of the pilot program. We have a toolbox to train people on. I talked about Kaizen events. We've also simplified some of our productivity metrics. The right side shows our progress. We are 60% complete in terms of foundational work, and we've spent a lot of time with our plant managers training and developing them, and we are ramping it up this year. We've just recruited new regional capability. I talked about the pull factor we've got from the other sites, and we're developing 4 lighthouse sites, 2 in North America and 2 in Europe with the full suite of tools. These projects are actually really important. We are on track to deliver a margin improvement of 100 basis points from Perform by the year 2028 and more thereafter. Let's come on to how we drive faster growth. Last year, we spent a lot of time laying out the foundations to drive faster growth in the next few years. And of the 5 columns on the chart, the first 2 are linked. We've looked at the way that we're structured, in particular, the sales structure. We've looked at the way we work across divisions, and we've done a fundamental reboot. We've improved sales capability. We've set up cross divisional groups such as one on European defense, and we've challenged our general managers to drive new growth. The middle column is all about growth investments. I'll talk about that in the next slide. And the right 2 columns are accelerants to the strategy. I'll cover both in the next few slides. All of this together will enable us to deliver our goal of mid-single-digit growth through the cycle. So let me give you some more tangible Grow examples. Across these projects, we're investing more than $60 million between '25 and '26. Firstly, the new S3P expansion in South Korea, it's the first time we've taken this outside the Western areas of Europe and North America, and we go live in the second half of the year. And we will service the Korean, the Japanese and the Chinese markets from this site and with the room in the site to develop it even further. The second one is we're adding new HIP capacity in the U.S. and also in France. The picture you can see is from Greenville, South Carolina, which is now a multipurpose aerospace site, where we're targeting the growing additive market. The third example here is we are moving 2 aerospace sites that were frankly substandard. Both also have significant growth potential. One is in Cincinnati, and the other one is in Los Angeles. And fourthly, our 2 Mexican automotive sites are close to full. So in the north of the country, we're putting in a new plant, which will meet the rising demand of our supply chain. These are just some examples that gives us the short- and medium-term confidence in growth, and we expect to see revenue growth from all of these projects by the end of the year. So our first accelerant is sustainability. As I've said before, you'd expect us to drive energy efficiency. This is even more important than ever. We've made more progress in 2025. In fact, we've driven energy intensity, that's energy usage against revenues down by over 1/4 in the last 5 to 6 years. Energy focus is a large theme in our general manager conferences. On the right, the chart shows our activities on the drivers of outsourcing from our customers with some new offers now. For example, we've now 5 net zero sites. And all of these broadens our proposition to our customers. And so we've built a solid pipeline of sustainability opportunities, and we're looking to make progress on this in 2026. Sustainability remains one of our important strands of our growth strategy. I'm very happy with the progress that we're making in M&A. Ben talked about the importance of recycling capital. We highlighted the French disposal that completed a few months ago. In January, we were pleased to announce the acquisition of Spectrum. I actually visited the site as part of the diligence process, and it's a great small business with a great team. And it also gives us access to some new aerospace supply chains. We're actively working our funnel and have a number of opportunities at different stages of development. Our aim is to add small- and medium-sized bolt-ons that are aligned to the strategy of improving our portfolio. So coming to outlook. This year, we expect to return to organic core growth. That will be led by strong growth in Aerospace & Defense and in IGT. And I couldn't be happier with the team and their focus there. We expect Industrial, and particularly Auto, to remain challenging. Clearly, there is a subdued economic backdrop and macro environment and geopolitical uncertainty. We'll deliver improvement in operating margins through volume growth, better mix and our self-help work. All of that means that we'll drive strategic progress, keeping the momentum to deliver a high-performing, resilient and faster-growing Bodycote. We also remain confident in our medium-term financial targets. With that, I will open up to questions. So if you're in the room, if you could raise your hand, and online, please post your question. Thank you.

Andy, we will start with you, if you don't mind.

Of course. I've got loads of questions, but I'll start with 3, and then, I'll come back if the other ones haven't been answered. Firstly, can we just talk about the Middle East, your exposures there? If you can just remind me where you're positioned and where you play. And I appreciate it's difficult, but any kind of early thoughts on how you're responding to what is currently a difficult situation. You talked about it very briefly, Jim, for the second question on M&A. The buyback is reasonably self-explanatory, but I just want to understand kind of the narrative around buybacks and M&A. And if you can maybe just go into a bit more detail about the funnel, and how that's progressed over the last I guess, 12 months, quality, size, any thoughts on pricing? And then last, but in no means least, probably one for Ben. Energy, my understanding is you're pretty well hedged from an energy perspective given what's going on with oil prices and broad energy prices. Can you just remind me, a, where you're up to on that; and b, the broader policy for the group?

Okay. Well, I'll kind of start, Ben can maybe take energy and the buyback. So in terms of the Middle East, our direct sales there are only 1% of our portfolio. We don't have any infrastructure. We don't have any people. We don't have any plants in that area. So thankfully, that is our position. In terms of the terminal way that we look at that, I mean, you'll know that energy cost is around 10% of our revenue. It's about GBP 70 million. Just to put it in context, labor is 40%. So -- and I'll say this before Ben says it, Ben and the team have done an amazing job at being more intentional and also structured around energy hedging. And certainly, for the next 2 quarters, we're in really good shape. We're very pleased with that. Ben can go into some of that detail. Then, obviously, we've -- it's actually well known that we've managed significant energy spikes through surcharges previously. Now, we do surcharges all the time. It's not just energy surcharges. Like, for example, in Los Angeles, we do environmental surcharges that are passed on, et cetera. So we have a well-oiled process around surcharges. We still actually do some energy surcharges now. So we will take the right decision on actually how we manage that going forward. I'll briefly talk about M&A and then pass to Ben. In terms of M&A, Spectrum, I mean, really was the first acquisition that the new team were involved in. Lake City was finished just before I joined the company. I think the integration of Lake City has gone fantastically well. I couldn't be happier with that. I really liked what I saw at Spectrum. It's a very small acquisition in terms of over 80% Aerospace & Defense opens up Pratt & Whitney supply chain. We're very, very happy with that. It's a great team. And it's already fitted. So the plumbing aspect within Spectrum is already in place. In fact, the new General Manager there was at the General Manager Conference at Dallas, we had last month, and he fully engaged. It's as though that they've been there a long time. So that's very positive. I think in terms of Spectrum, $8 million; Lake City, $50 million. I think we have a range of targets between these 2 bookends. And certainly, as we look at the funnel, we've got over 50 targets at various phases within the funnel, some at the top end of the funnel. So we're very, very focused in terms of wanting to do more acquisitions as part of our capital allocation -- balanced capital allocation that Ben will talk to in a minute. It's a huge focus. In fact, we've just recruited a consultant to help us in terms of Aerospace & Defense. So -- yes, I'll pass to you, Ben.

Yes. So just picking up on a couple of those with a little bit more color, but you've given a good picture, Jim. Thank you. On hedging, we've got -- we're very pleased with the level of cover we've got for the next 2 quarters. It does start to tail off as we go through the fourth quarter, but -- and typically, in a business like this, we haven't got much hedge cover for 2027, but that is intentional, actually. We don't want to be over-hedged in the future. That can create problems in and of itself. And what I would add is a bit more color that we -- our hedging that we have for the next 2 quarters, if anything, we have a much higher bias to that hedging in Europe than we do in North America. Sometimes you've maybe got to be lucky as well as being smart, but I'll take either. So that does leave us in a better position, certainly, where we've seen the big spikes in European gas prices and no doubt electricity prices. Let's see how long the conflict goes on for. As Jim mentioned, we have used surcharges in the past to protect our economics as a business. It's never easy to put pricing up to customers. It's very much let's wait and see, see how things develop over the next few weeks, but it's something we're monitoring very closely as to whether we may need to revisit doing that to protect our economics. And I think on your second question about the narrative around both the buyback and M&A, what would I add to what Jim has said? I suppose, look, what we want to do is we want to grow the business. We want to prosecute and execute the strategy of not just growing the business, but growing the business in the areas that are more differentiated, higher growth, Specialist Technologies, Aerospace, Industrial Gas Turbines, Medical, et cetera. And at the same time, we're very mindful of wanting to manage rightly for shareholders the risk/reward balance, which argues to some extent, a share buyback and the attraction of a share buyback at the valuation that we're at today as well. But we are wanting to do all of those 3 things and balance all of those 3 things. And what I'd also add is that with leverage at 0.6x, you can do the math, if our target is within a range of 0.5x to 1.5x, that additional circa 1 turn of leverage gives us a little bit more than GBP 200 million of firepower to do stuff with. So that gives us more than adequate capacity to do this GBP 80 million buyback and to give us a good pool of funding to execute on M&A. And of course, the business is going to be generating free cash flow over that 2-year period as well. So we do believe that it genuinely gives us optionality to do all of these 3 things with hopefully the right balance.

Jonathan, you want to?

It's Jonathan from Barclays. I just have 2 questions, please. The first one was just on Industrial Gas Turbines and the outlook there. Can you just sort of talk us through just in terms of what you're seeing or how much revenue visibility you have within that business? Do you feel that you need to add capacity to sort of service the forthcoming demand? And also, is there opportunities within that business or within Industrial Gas Turbines to push your specialist technologies further into that than it currently is? And then, the second question was just in terms of the Optimise and the remaining GBP 11 million of benefits to come through. How does that split out? Is that half of that again go into the central cost charge, the other side go through into Precision Heat Treatment?

I'll take the first question. Ben, if you can take. So as we said in the prepared remarks, IGT grew 6% in 2024. We expect that it will grow faster, expect it will grow more this year. Now, there has been a little bit of supply chain constraints, I mean, that we've seen in some of our plants, especially in North America. I referenced the Hebron site there, which is in Cincinnati. It primarily does IGT. We've just actually set up an extension to that facility, primarily for IGT work. So we are doing a lot of both IGT and additive manufacturing related as part of long-term agreements. And so, as we see the market ramping up and supply chain constraints easing, then we are confident that we will grow with that. So in terms of Spec Tech, the wider question around Spec Tech, I come back to how we were very siloed driven in terms of sales and business development. Internally now, we're actually very different, so between North America, all the Specialist Technologies and also the Precision Heat and Aerospace & Defense. And all of that is actually shared within single business development silos now and not individual silos. So we -- one of our -- like for example, some customers were complaining we -- in a single flow, we had to give them 2 invoices, which is just like crazy because one was Specialist and one was Precision. That's all gone. So I think internally, we were creating barriers potentially internally. And certainly, when I met some customers at the Paris Air Show, that's what they were telling me. So we've tried to really focus on to make us a seamless service. And I think we'll start seeing the benefits, not just in IGT, but in the wider aerospace space actually this year.

Should I pick up on the one on Optimise? So yes, you're right, GBP 4 million delivered, GBP 11 million -- at least GBP 11 million to go. You saw Jim's chart on the shape and profile of that GBP 11 million to go, GBP 4 million or so this year, probably GBP 4 million to GBP 5 million to deliver in 2027 and then the remaining tail in 2028. Where do those benefits feed in of what is left? I'd draw you to that -- again, the Optimise chart that Jim shared. The majority of the overhead on the timeline. So the majority of the overhead actions are done. There are still some left, not that many. Those that are left are in more of the divisions. There's not further overhead action left in central costs. And therefore, there's a bit in the divisions from overhead. The remaining piece of the Optimise benefit is more going to be driven and felt from the retained revenues and the benefits, the drop-through benefit from where we retain revenues by moving work from a closed plant to another Bodycote plant that is proximal, but a much higher drop-through. To state the obvious, that will be in the divisions, predominantly in Precision Heat Treatment.

I'm Tom Elgar from Deutsche Numis. I think 2 topics for me. I think the first one is, I just want to pick up on your comments, Jim, just about the reorganization the business is having in terms of market facing on the business development side. Clearly, there's a concerted effort to leverage the network more fully across the business. Should we be expecting to see LTAs rise across the portfolio? Does all this lead to some more formal integration of Bodycote into supply chains of your key strategic customers, thinking about A&D, thinking about IGT, as mentioned previously? Some comments on that would be great. And then the second part of that, which perhaps leads on is, could we extend that into how we're thinking about pricing across the portfolio? I think you mentioned tailwinds this year. How far along in the journey do you think you are in terms of valuing the new Bodycote more appropriately given the new capabilities and capacity and value you're bringing?

Yes. Okay. Well, I'll kick off. So the first thing, what was obvious as we looked at the internal makeup of the company in terms of business development sales is we had internal barriers that weren't actually helping us. That was the first way that we looked at things. We weren't really sharing information across the whole from a kind of end market point of view because we've got technologies and we've got end markets and we've got regions. And how you navigate through that -- every company has got the same issue, how you navigate through that is either going to define you or actually not define you. So I think that was important. We don't necessarily see a significant increase in LTAs. We do -- because there is a -- sometimes there's a trade-off in LTAs, where you want the business, but you're up again -- the trade-off is that you can't sometimes have to be quite sharp on the pencil in terms of actually price. I think the price that we saw was that we were potentially missing opportunities not being through the whole way through the value chain. So a part would come into one of our sites, Precision Heat Treatment, and it would go somewhere else, whereas if actually we can control more of the stages of the process, that's kind of really where the price actually was. So I'd say that we've been okay at kind of leveraging our network, but we haven't been great at it. And certainly, the new business development, and execution and organization, we've actually put in place realizes that. And we've got -- so I talked about Greenville being an aerospace center of excellence, so it does Precision and also HIP, right? Now, that's a minority. But we also have other HIP sites that have precision heat treat capacity that just weren't really leverage. So we weren't really leveraging our network. So I think there is a bigger opportunity here to sweat our kind of assets and also regions where we didn't really fully focus, especially in aerospace rather than in IGT. So I think that will take time to come through, but it is actually part of the growth focus we now actually have within. And I think the final thing I would say is that -- I start with the team because we have a new President of Aerospace & Defense and Energy, and who I think some of you met at the Capital Markets Day. She's actually -- 50% of her team is actually new. We've really top graded the teams from my team through the divisional teams. So we have really hired for growth and actually where we're taking the business, which I couldn't be happier with. Do you want to talk about pricing?

Yes. So look, I think on the pricing piece, look, I mean, pricing -- your customers never embrace you with open arms about price increases or at least not most normal customers. But as we move forward, I think the business historically has a good track record of being able to push through annual price increases. In some years and in some markets, that is harder than in others. And clearly, if we think back to 2025, in Automotive & Industrial, let's face it, it was tougher rather than easier. Pricing went up, but it was not an easy discussion. As we move forward, I think there's 2 aspects around our pricing that I would flag. And I suppose at its heart, your ability -- any business's ability to price incrementally is supported by differentiation and value add, isn't it? And so the more differentiated we are, and the more value add we can provide versus our competitors, it puts you in a better position to price. And that is also a core part of the strategy. Differentiation doesn't entirely equal Specialist Technologies, but it does, and it equals the more differentiated ends of precision heat treatment. And that is the way the portfolio in the business is increasingly shifting. That will help our pricing bias. And secondly, value add, it comes back to Jim's point about where we can aggregate, leverage, bundle some of our services in a way that some of our smaller stand-alone competitors who might just provide single processes can't do. And, therefore, by being able to do more of that and extracting more of that opportunity, which historically the business has not been as good at as it could have been. I think that should also help our ability to incrementally price as well as win more volume. So look, I think pricing is never easy. It won't suddenly change. But history says we can price. And as we execute the strategy, I think it enhances our opportunity and chances there rather than reduces them.

It's Harry Philips, Peel Hunt. Sorry, you're hiding there, Jim. I can't quite see. Three questions, please. Just first of all, on the Perform sort of initiative, just trying to get an understanding of -- I mean, clearly, you set out the example in Cincinnati about how you've improved the flow through the plant. But to really get towards that 100 basis point improvement, how much is sort of additional revenue dropping through that improved, more efficient cost base? And how much is cost in its own right, i.e., if there were no growth, what would Perform add, and maybe it's over detailed, but just an idea of the sort of sensitivity. Is it more a cost or more a sort of revenue drop-through aspect? The second is the second half organics, which were pretty punchy, but probably against softer comps in '24. So we're looking into '25, is there any reason we should sort of restrain our enthusiasm for sort of running those forward, particularly as the oil and gas sort of balancing item abates? And then lastly, on the variable consideration, sort of guidance, you've given, it'd be quite interesting to know the assumptions you've made. Is that a Performance? I'd say it should be quite interesting to know the assumptions of what drives that, maybe it will be in the accounts later, but quite interesting.

Okay. I'll take the first one, and Ben can take 2 and 3, Harry. Well, thanks for that. Perform is actually really focused on improving productivity and also process efficiency. That's really the nub of it. So you get improvements, and you get cost improvements. And I would always say that you should always aim a target at more cost improvements because they're much more certain and in your control. So I usually say that should be 2/3 to 3/4 of the -- talking about sensitivities. But if we go back to why we did Perform in the first place, I think that's important. The first thing is I've now been at 67 sites, and all of them have got something to offer other sites, and it's all different. So if we can aggregate that and look at different best -- it could be furnace loading, it could be the way that they marshal the visual side of things. And we weren't capturing that. And that comes down to either process improvement or productivity, which is really a function of actually cost. So last year, we hired a new Head of Continuous Improvement, who joined us just before the half year, actually. Previous to that, we were running a few pilot programs, but he's an ex-Danaher guy, unbelievable what he's achieved in 6 months, running full pilot programs, not just in the U.S., we did a couple in France. We did one -- I think -- so we did one in France that reduced our kind of lead time by 40%, just like a single Kaizen event. So we haven't done these before. So the opportunity plus all the VP group, which is kind of one before -- one below presidents, there's about 23 VPs. They couldn't be happier to get involved in like learning new skills and capability. And I think the final comment I make is it's a methodical rollout. I've been through this like so many times. People learn something, then they fail on the implementation because they have -- they don't really know the subtleties. So this is actually why it's a multiyear program. You learn by doing -- actually, you learn by failing so that -- the process actually doesn't really improve. And so you do it again, and you learn something, and then, you build the skill set around that. So I think -- as I think about it, mainly cost focus, okay, which is good. So if we grow, we could get incremental benefit, not that Ben will allow us -- allow me to say that. But we -- there's a real momentum here, and we trained everyone at the General Manager Conference on safety and how we're thinking about safety, quality, delivery cost. And it's -- we're really creating a movement within Bodycote, but it takes a long time to roll out. Sorry, it's a bit of an extended answer, but it's just like so important that we build this in the company. Sorry, over to you.

No. Thanks, Jim. So I'll take your question on the second half organics, and I would never wish to stand between you and your enthusiasm, Harry. It's a dangerous place to be. But look, I mean, you're right, so first half, minus 3.5%; second half, plus 3.2%. What drove that improvement in the second half, in particular, strong acceleration in Aerospace & Defense, decent growth in our Industrial Gas Turbines that also picked up in the second half compared to the first half a little bit. Still challenging markets in the second half in industrial and in automotive, particularly U.S. industrial, as you heard from Jim. And oil and gas that in the second half was still probably at the group level down 20%, 25% in the second half. So as you roll forward, you're kind of saying, well, look at our outlook statement, look at where we're steering to individual end markets. And you're kind of saying, well, Aerospace, Defense, IGT, continuation of those kind of trends, good growth, strong growth. Industrial, probably remains challenging. Automotive, if you look at global light vehicle production, I think that probably remains quite challenging. But the oil and gas feature, which washes through from a comps perspective, certainly once we get to the end of the first quarter, starts to go away. So I think that gives you some sort of boundary conditions as to well, okay, as you fly forward, what sort of level of organic growth do you think the business might be capable of delivering in 2026? That's going to be your call, I'm not going to tell you what number to put in. But that gives you some conditions as you look at those end markets, you look at what we delivered in the second half, and you say that, that oil and gas headwind starts to diminish. It's only 5% or 6% of sales in oil and gas, right? But it's nonetheless helpful rather than unhelpful. And your third question, remind me your third question, sorry.

Just on the variable consideration, you sort of put a number in there of sort of GBP 7 million to GBP 8 million. And it's just to understand if that's sort of formulaic against operational performance and...

Yes, it is -- it's entirely -- well, 80% of it is driven by operational financial -- it's driven by financial performance in terms of variable metrics. There's 20% of our -- for the whole organization where it's driven by your personal performance, but 80% is financial performance. You'll see when the annual report comes out what the level of payout has been for Jim and I at least, and that trickles down through the organization. Everybody is on the same kind of approach and metrics. And what we're saying is for 2026 from a planning perspective, inevitably, our planning assumption is we hit our budget. 2025, we did not hit our budget, as you'll see when the annual report comes out, and that's hardly a state secret in terms of where the numbers landed. So yes, the headwind, if we hit our budget, that's the 100 basis point of headwind.

And then sorry, just one -- very final one on CapEx. How much of CapEx is maintenance? And how much -- I'm again coming back to Perform, how much would be sort of not necessarily just Perform, but growth CapEx for want of a phrase?

It probably splits, kind of 60-ish percent is maintenance, 40% is growth.

And on Perform, there's like minor CapEx. We're looking at some automation projects, and -- but it's noise around the edges.

Can I follow up with a quick few questions? It's Andy from Jefferies again. On IGT, are you broadly agnostic to from a customer base perspective, large versus small, et cetera? Or do you guys play in specific areas or with specific customers? On Perform, 2 really quick questions. You talked about a $50 million -- sorry, $50,000 total cost to implement. Are you able to give us what the benefits were from that spend? And just on the foundational versus advanced in terms of the rollout, from an idiot's perspective, as you know, Ben, it would appear that the foundational bit is the, I would say, more standardized, quite straightforward to roll out across multiple plants, yet the advanced is going to be quite complicated because every plant is different. Does that also bring with it the same amount of benefits, i.e., the foundational bit gives you a good start, but the advanced is where you get the majority of that 100 basis points of margin?

Yes. Let me take these. In IGT, we are at the larger end of the IGT range. And without -- I'm not going to mention customer names here, but they're household names. And we've got good relationships. In fact, we even do some R&D for some of them. So we're -- that's -- it certainly answers that. You talked about the $50,000 of that cost. That's just moving machines and just going about. In terms of actually benefit, the team usually, initially, within 3 months, it pays back and then gathers momentum after that. So it's very, very short. The investment Ben talked about was more about headcount because we've had -- so we now have regional CI leads, Europe just started a few months back, and their purpose is to work with the lighthouse sites and also train the VPs and also general managers. And in the lighthouse sites, we're recruiting dedicated CI people as part of the process, but they'll report into the general manager. So there's a kind of structure there. So very, very quick payback. In terms of your foundational and advanced, you're absolutely right. Foundational is almost like a baseline of actually continuous improvement. So 5S, making sure that workspaces are actually clean -- shadow boards, everything is to hand. You've got a daily management system, which is safety, quality, delivery cost. And so if an issue comes in and you're problem solving that. So this is just the baseline stuff, which actually in terms of safety and some of the quality delivery and cost, we're actually very advanced through the whole portfolio. What we have internal targets that I tell the presidents, we should be looking to deliver 1% operating margin per year in improvement projects. Now, you never hit that, but you've got enough initiative to drive that, and there's always bumps in the road. In terms of advanced stuff, that's where you -- so we'd look at error-proofing, and it's called poka-yoke, which is not a joke. The -- so we'd look at error-proofing. You'd look at changeover times. You'd look at different ways. You'd look at where you can really have advanced visual management, like they call them like water spiders, where someone actually comes in and moves stuff around stations because of the condition of a visual representation. So these are all advanced stuff, and they'll all be in the lighthouse pilot programs. And we've got the team that can deliver that. Any other questions in the room? Yes.

With regards to your Aerospace & Defense end market, do you see yourselves growing alongside delivery numbers for Boeing and Airbus? Or could you go above those numbers for this company?

Yes. I mean, what we're guiding to, obviously, last year, Aerospace actually grew 8%. And we -- so what we would say is that we're looking high single digit, a low double digit in both Aerospace and Defense. That's our guidance. I think some of the numbers that I've seen on deliveries are slightly higher than that, I think, from what I remember. So -- but that would be the level that we'd actually look to guide it. It's never a straight line year-on-year. There's -- we hear about different supply chain congestion. We talked about it in IGT earlier. There's still some in Aerospace. So that -- I think we're comfortable talking about that.

Is that volume growth or volume and price with that high single digit?

Volume growth.

Yes. The other dimension, just to feed into that, is for our Aerospace business, it's more exposed to original equipment, and therefore, OEM build rates. Your question is kind of a very good question. But it's probably about 60% OE and about 40% that's driven by the aftermarket. So you've got to look at it through the blended sort of average of both of those together.

With that, we'll call the meeting to a close. Thanks very much. Thank you.

Thank you.