Good morning and welcome to Bodycote's 2024 full-year results. I'm Jim Fairbairn, CEO, and with me is our CFO, Ben Fidler. 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 2024 in difficult markets. It was a tough trading year, but we delivered. In terms of progress, I'm particularly pleased with 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 five medium-term financial targets and a further four related to sustainability. We created two leading divisions with clear strategies. We have three 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 five 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 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 mixed 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 2024, 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 2024 despite those challenging markets.
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 non-core segment in terms of growth. Non-core for us is cyclical, high-carbon, low-margin processes. Profit in non-core is either loss-making or just over break-even. 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. 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. A mixed end market picture overall with some real challenges, which makes the performance in 2024 more pleasing. I'll hand over to Ben now to take you through the detail.
Thank you, Jim. 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. 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 place a lot of focus on driving efficiency and driving operating margins and on cost agility.
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 increase by 90 basis points to 15.7%. 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. 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. 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 non-core division the parts of the portfolio that we're going to be exiting from. Stri p 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 non-core businesses in and, to state the obvious, you get to the group. How did the group perform? Through the group lens, revenue GBP 757 million, down 4% organically, but flat once the noise of surcharges is 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 forwards, 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 GBP 48.6 . The full-year dividend, as I'm sure you've seen, was up 1.3% to GBP 23 . 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 a GBP 8 million reduction in profit. Non-core profits, also lower, fell by GBP 1.4 million. Remember, those non-core businesses are 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. 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. We were 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 three years, we remain very confident on delivering continued progress in margins to achieve our target of more than 20% by 2028. It will not necessarily be linear every single year, but 2024 was a good start on that journey, and the improvements 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. 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. 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. Jim's already taken you through the group-wide picture there. You can see for specialist technologies, it clearly benefited from its large exposure to aerospace and 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 2024. 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.
Overall, how would I frame it? Another good year for specialist technologies. 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 donut chart broken out, strong growth in aerospace and defence of almost 9%.
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. 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 is a lot of work from the team that went into achieving and delivering that. 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 three 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 tail into 2026.
As a reminder, the net cash costs on that program will be around GBP 25 million-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. 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 then, 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%-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 a legacy U.S. environmental matter. Working capital again was carefully controlled and remains a focus area. As flagged in the guidance we provided in March last year, cash tax was significantly higher, reflecting a non-repeat 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 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. Going forwards, we will maintain this same balanced and disciplined approach to capital allocation, with a balance sheet that is 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, and Iraq's on. 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. 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 focus 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. 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 two strong platforms anchored around our key strengths. Firstly, specialist technologies, which, to remind you, consists of three highly differentiated businesses: S3P, HIP, surface treatment, and we are the global leader in two 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 three clear strategic levers that will drive progress in the company: 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 three strategic levers, we've made early headway in all three, and especially in optimize where we are in the full execution phase. We are well on track to deliver targeted savings in 2025 from a mixture of overhead savings and plant consolidations.
We will then deliver GBP 12 million-GBP 14 million full run rate benefits by the end of 2026. 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. From this work, we have 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 2026 and beyond. On the growth side, we now have a clear growth framework for how we are approaching growth. We have 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 a recent capital markets event. I'm very happy with the progress. We're about a third of the way through the overhead reduction program and the closures and consolidations of the target sites. This year, we'll see low single-digit million GBP profit benefit, and we will have laid the groundwork for the full year run rate by the end of 2026. I'd like to bring this to life, and this is a real-life example in the Midwest U.S. We're taking three sites and 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.
It is 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 heat is our internal operational framework, which will help us deliver evolution at pace. It will apply to all of our businesses. 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. When you see HRO has already hit the ground running and is driving progress, it will start to look at barriers and frustrations within the organization that get 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. E stands for agile cost base. It's a 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 2024. T is about being a sustainability leader. As we report in the future, we'll dive into different elements of the framework to keep you updated on our progress. This time around, I want to focus on two elements, the E and the T. The E of 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 a core capability for me. I have many years' experience successfully implementing lean programs across my previous businesses. 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. What the team have 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.
From this, we decreased our average turnaround time by two-thirds and improved our cost of quality by over 90%. That is only one action in one plant. That really demonstrates the real power of our focus business system. This year, we will make another step change in the deployment of productivity actions, including better operational efficiency and also more flexible labor utilization. Our Chief Excellence Officer starts on the 1st of June. In our business, it is 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 are 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 SBTi target at the end of last year, which is a 46% reduction to 2019 levels by 2030. Progress is all about many actions. One of the examples here on the slide is in our 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 saving with a payback of under two years. We have now installed eight of these systems in the last two years. We will continue to demonstrate leadership in sustainability both internally and externally with our customers and investors. Moving to growth, our focus in driving growth is on three key dimensions: end market, processes, and geography.
At our capital markets event last year, we 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 growth in these areas through a mixture of organic and selective inorganic investment. We've already gone through a funnel of capital projects and have prioritized them based on strategic alignment to these three dimensions and financial returns and risk. As you can see, we're modernizing a number of our aerospace facilities in the U.S. We're expanding our capacity both in the U.S. and also in Europe, and we're increasing our footprint in Turkey and China. These are deliberate actions.
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. We will talk more about these elements in future results. 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 and 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 are all aware, just around tariffs and trade. We are fortunate in that in our business model, it is a truly local-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. 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. 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. There is lots to be done, and I'm looking forward to coming back in due course to tell you about our progress.
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.
Yeah, good morning both. Thanks for the presentation.
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 share buybacks, and kind of what is the opportunity set do you see for M&A?
Yeah, 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 fabulous. It's one of our best sites in the network. That was a very targeted and selective acquisition. We'd love to do more Lake Cities. We are actually—so we don't have any near-term active acquisitions. We are actually building a funnel of acquisition opportunities, and they will be targeted, focused, and high quality, just like Lake City, if we decide to go forward. We don't have anything in the near future. 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. It looks to the three dimensions that we talked about.
End market are good end market areas, which would be aerospace, energy, medical processes. It's likely acquisitions will be more in specialist technologies. Obviously, end market, there may be opportunities—sorry, geography, there may be kind of geographical opportunities. I think as we go through this year, we're building, we're working that funnel, but we will stay disciplined. It will be part of the Bodycote growth story.
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 that we know about, all the challenges we've had. Can you just confirm that the recovery is coming back as we're hearing from other people? Clearly, supply chain constrained, but hopefully we're coming back and then should improve into the second half.
Then a cracking job in auto last year, outperforming the underlying markets. Is that something that you can see continuing into 2025? It will be helpful on those.
Out of the auto gear space, yeah. 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 vehicle production globally, it was actually down 1%. Why is that? 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 new local sales teams. Also, we pivoted the business from really focusing on international OEMs to the domestic OEMs. That's actually had a massive benefit second half of last year. Also this year, they're really powering ahead.
That is a bright spot for us. Mexico also had a great year. They had some good wins in terms of new platforms that they had been focusing on, primarily around steering and around e-brakes, believe it or not. That has been their focus. 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. We are trying to—we are focused on trying to do the right things and trying to read the market for the next five years.
Yeah, should I pick up on the aerospace question? Yeah, 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 am sure you have backed out and done your maths.
You will pull out from that that actually November, December were fairly weak for aerospace. 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? We 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. 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.
Thank you. 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 all done now?
That's pretty much it. That's all done. I mean, the benefit from that improved pricing you saw in 2024. And that doesn't mean it goes away. It just means that's the new base point as we go forward.
Hi, Stephan.
Yeah, hi morning. Stephan Klepp from HSBC. I have a few as well.
Continuing probably with the end markets and then as well with the exit rates, what kind of phasing should we expect? You said run rates 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? Probably then as well talking about how do you see the evolution of your top line? You did not comment on that at all, so it would be nice to hear what you think about that. Lastly, can we talk about free cash flow? There is a couple of items that we are going to expect this year, and CapEx will pick up again.
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 there? Yeah, why don't I pick up on those points?
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 effects 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. 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. There is a secondary effect, which we're not going to call. We're managing the things we're controlling, and we're managing them hard around costs, and we'll continue to do that. 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 am, Stephan, so I'll leave that up to you to call the view on that one. Those are the effects you need to take into consideration on the H1, H2 phasing as we look to the year. On free cash flow, 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. 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 25-30 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. You need to take that into consideration. 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. The group has 0.3 x net debt EBITDA in terms of leverage. We've got a very comfortable balance sheet. We've said we're happy operating in a 0.5-1.5 net debt EBITDA range.
Our covenants allow us to go to three, but we do not want to push things quite that racely. There is, of course, some modest mathematical effect, but we have 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.
Hi, I am Mark Fielding from RBC. I have three questions, actually. They are quite unrelated, so maybe I will take them one at a time. That might be easier. First one on my favorite slide, the technical guidance slide. Obviously, you are picking out the increase in share-based payments, which is a sort of GBP 2.5 million-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? What's his compensating for that headwind in that commentary? Maybe just, is there anything on phasing in that as well, first half, second half?
Yeah, 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. 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. With the best will 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.
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. It's not incremental to that. It is embedded within that. Following that, I'm a bit curious. Is it 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. I'm just a little bit curious, what's the offset in the balance of numbers versus the run rate in the second half? There's clearly a lot of moving pieces within it, and you're talking about an order of magnitude that is a sort of $2 million-$4 million effect.
By the time you divided that by 12 to turn it into a run rate, it's kind of noise around the edges, and I think is captured within the word broadly. I think, yeah. Yeah, that's fine. There's a number of effects in there, some positive, some negative.
That's fine. Then separately, in terms of you were pulling out for specialist 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 technologies. Is the project business accountable for all the growth? Is it, say, GBP 10 million or so of revenue? 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. The energy business is actually slightly more than the number that you say. It's really made up of two kind of core drivers. The first one is IGT, an 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 US in terms of IGT, and that will play out through 2025. We see that as actually strong growth within the energy this year. The challenge is in oil and gas. The project you referenced, it was a two-year project that revenued over two years. I think the impact to 2024 is in low single-digit millions in terms of profitability. 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. The good thing is that because we did that project well, it's become a bit of a reference, and actually we're bidding more work. 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 from that. Most of the energy projects are fairly lumpy, but this is quite an unusual size for us. That is the reason that we pulled it out.
Thank you. 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.
I know there's a lot of other moving parts with energy prices and things. Just your general thoughts on how that world evolves and how your actions fit into it.
Yeah, I mean, 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. Also, it's becoming an avenue for revenue growth.
Lily and her team are out constantly visiting customers, showing them the benefits of transferring some of their heat treatment to lower carbon processes and ways that we can do it more efficiently than they can do it in-house. I think as a strategy, it's kind of more than just energy costs, but that's an important kind of part of it. I think we talked to 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 insource to outsource. 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.
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 two areas. It's got the internal area where we train our sales teams, how we narrate proposals, how we become a thought leader within the industry. It's also the commercial side of things, getting out in front of customers and trying to convince them. Part of that, if you think a global manufacturer wouldn't outsource anything other than to someone who's got a green energy credential. That's the way we're going. We monitor energy costs. It's part of the operational reviews every month. We're looking at alternative suppliers. We talked about adiabatic cooling as one. We're continually looking at that.
Thank you.
Excuse me, it's Friday. It's 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 non-core bit, and we've talked about the core bit, but you had that little square of fix. Just maybe an update on how that's evolving. Is more going to slip into non-core and other into core?
Yeah, I mean, let me be perfectly frank. When we assessed summer last year, we assessed the whole business, and a third of our portfolio needed to be fixed or closed. It was that order. So that's quite a significant number of plants. So subsequently, okay, we looked at what kind of goes in the close and what goes in the fix.
All of these plants that are in the third of the portfolio that we deem kind of intervention, we've got fixed plans for that. These are ongoing. I'm very happy with progress. 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. All the presidents, the vice presidents are all working together just around fix. There is quite a lot of fix activity going on, and that will come through in growth and through margins, kind of through time. The other two-thirds of the portfolio, all the spec tech is in the other two-thirds. That is about nurturing. That is 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 the pricing is good. You can get away with a lot of stuff. That is where we are with that.
Thank you. Just secondly, on the M&A environment and obviously your immediate sort of competition, obvious competition of 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. You have got more competition seemingly coming into that segment. Bodycote has never been a sort of busy acquirer. I mean, you did City, you did Ellison back in 2020. You do not have to go back quite a long time for other deals.
Just that broader capital allocation, and Ben touched upon it in passing to an earlier question, is you've got about 0.5-1.5. On my numbers, you maybe get to 0.5, 0.6 leverage this year, say. Then you get back into your normal cycle, ex the restructuring. You can be net cash in two, three years' time easily if you do not do a deal or whatever. Yeah, I appreciate that. Sort of how serious, I mean, obviously, M&A is serious, but the track record suggests it is sort of opportunistic at best.
Yeah, let me give some kind of perspectives on that. The first thing is any deals that you read about in the press, okay, we have already looked at. That is not any surprise. 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 are in the traditional heat treatment. We're just not going to do that going forward. That probably brings down the landscape a little bit. I would also say that 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 know people. 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 are building a very, very good, focused, selective, targeted funnel that we will look to nurture this year and beyond. 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.
Just to maybe add to, I guess, your question, Harry, was alluding to one of Aalberts' recent acquisitions in the U.S. We did look at that business. It brought nothing to Bodycote that we did not have already. We chose not to participate in that process. There was one plant, one part of it that potentially was interesting, had one HIP vessel, small. Remember, those areas we want to grow. Competitors may be doing small things like this, but in HIP, we have four times the installed capacity of the next player.
In S3P, we've got five to seven times the revenue of the next player. In surface technology, we are the number two player globally. 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. It didn't fit with what we wanted, which goes 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 smorgasbord of auto or industrial exposure in Europe or North America, you shouldn't expect to see us investing or buying in those particular areas.
Thanks. I'll go next. It's on Joyce and Lewis. Probably two areas for me.
I think firstly, can you give a sense of where sort of you're 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. 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 to 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. In terms of spec tech overall, I mean, last year was a good year for us, 5% growth in the year.
Obviously, our target of high single digit is a through cycle target. 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 three other businesses. On the slide, talk to S3P, where 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. And HIP, Ben talked about our market position. We have got two new expansion projects that we will progress this year and also next year. We've been quite creative in the ways that we're going to shorten these installs so that we can build revenue from that.
Then surface treatment, I was over in the U.S. in January, actually, visited one of our plants, Hebron. They do a lot of kind of gas turbine work. From that visit, we agreed to expand the building because they needed kind of space to grow. That building had been through several lean assessments if we could do more in the building. You can imagine that. We are going to expand the building. 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. We will always put our best foot forward for that division because as an engineer, going and seeing these businesses, it is premium engineering. We will support that going forward.
Yeah, should I pick up on the one on utilization around industrial, just looking at industrial plant utilization? 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 purely, 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 focus plants globally. Now, within that, that is an average. There'll be some where they are much higher, particularly in the areas where we have been investing in precision heat treatment. For example, China, Turkey, where we've added new plants.
Mexico, which is actually a small part of the business, but running at full capacity. Utilization there is actually 85% or so. The picture does vary globally, but overall, it's about 55%. 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. That's looked at through the asset utilization lens. Essentially, what it means is in a number of these plants where you have multiple furnaces, there are two or three of them that at the moment are constantly sitting idle, not being operated. Similarly, you've managed your labor cost accordingly in those sites.
Just actually one follow-on point that came up a few weeks ago. Obviously, tariffs, no one really knows the situation. It changes by the hour, I think. We can flex our capacity in North America to suit the tariff situation within that country. We've only got a couple of plants in Mexico, a couple of plants in Canada. The majority of our plants are actually in the U.S. Again, back, the running at these utilization. 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.
Good morning. Hi, it's Jonathan Hearn from Parker. It's just two questions, hopefully quite quick questions. First one was just on HIP within specialist technology. Obviously, you call 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? As we look into 2025, what contribution can we continue to see for that to the specialist technologies margin? The second question is just kind of following on from the last. I just wonder if you could sort of give us a little bit more color about those or the industrial sector. Obviously, there's a catch-all, 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? Thank you.
You want to take the first question or second?
Yeah. Of that 300 basis points, around about 100 basis points of that came from improved execution. It actually broke down fairly.
The genuine maths, 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 from in HIP. There was a sort of 60 basis points-70 basis point impact positively from the contribution of the consolidation of Lake City and its higher margins. Because we go forwards, there is further opportunity to go for, absolutely, in terms of the margins and specialist technology and further to go for in terms of our operational execution. We are working and driving through that path. One of the plants that Jim put on the screen, which I think was Camas, was not it?
Yeah.
Which is in the Pacific Northwest, one of our big HIP facilities. That is one of the ones that actually, not solely, but contributed to that benefit.
There is more to go for even in those plants and in other of our specialist technology plants. Our confidence of achieving margins in specialist technology of more than 30% by 2028 very much remains. That is, 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, industrial markets in the presentation was down at 6%. That was in an early slide. As you can imagine, it is 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. It's going to be the same strategy going forward about how we manage our downside gearing and things like that. We look at this every day, how we're looking at plants and how we're thinking about it. You can be safe in that kind of regard.
I'll maybe pick up with one 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 email. Yeah, 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?
Yeah, that's a good question. We've actually read and heard some of the kind of customers in some of the industries, like in Germany, potentially rebadging, moving to new defense kind of opportunities. We have the potential in our network to pivot to where our customers are going. We see big opportunity. For example, we don't do much aerospace work in Germany. That's a matter of the way that we're structured and probably a bit of lack of flexibility. We have the capability to do that. 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. Thanks for your support. Thank you.