Good morning, everyone. It's good to see you in person. It's the first time for quite a while. Thank you. The first thing I'd like to sort of just hit the invest of, I think I'm probably the luckiest Chief Executive in the country at the moment. The reason for that is I've not just got one CFO, I've got two, right? I mean, how good can it get? Dominique Yates obviously is retiring. Welcome to Ben. He's coming in to fill his shoes. We're really looking forward to working together. There's one thing I would just like to make a comment on is that those of you that are coming to our soiree on Wednesday, we will be passing the hat around to help defray the costs of Dominique's retirement present.
By the way, this is Bodycote, so cash only. Okay? Turning to the business of the morning. The basic results here, we feel pretty pleasing and, you know, we're gonna take you through as we usually do, through the overview, which I will do. Then Dominic will come and do the financial review, then I'll come back and do the business review and then finally wrap up with a summary and outlook. Moving to the financial highlights.
Before I go much further through here, I just want to point out to you that we would like you, if you can, to focus on revenues excluding surcharges, and that will be a theme through this because it's really about what's our underlying revenues and where we go to in the future. Reason for that is obvious. Surcharges come and go. They don't contain any profit. Price rises and volume growth are here. Revenues in total up to 20.8%. Clearly, if you take it at constant currencies, just over 17%, but that excluding surcharges piece is 10% growth, just over. That's the underlying revenue growth. Operating profit up 19%. We've clearly got a strong balance sheet, and we're recommending a final ordinary dividend of 14.9 P.
Just to remind folks, for those who are new to the case, this makes the over 35 years track record of an uninterrupted dividend maintain or increase. Moving on to key achievements. Clearly, pretty strong growth, and in revenue and profit. The point I'd like to make here, which I'll come onto on the next slide, is about inflation. Our price increases have fully recovered labor and general cost inflation. The surcharges, they cover the energy cost. Don't forget, energy for us is gas and electricity. Once we made it into the second half, having introduced the surcharge machine, if I can call it that, it's now well tuned in. But we did have a shortfall in the first half of GBP 5 million.
Operating margins, which Dominique will expand on, basically 15%, but if you get rid of those surcharges again from the revenue only, it's 16.1%. A theme here that you should be taking away is there's good momentum in this business. That is something that isn't here. This is something that we're seeing building. Our carbon reduction strategy is working very well, and we'll talk more about that when I come back and do the business overview. Just on the inflation point. Energy prices are now falling, and the surcharges are being reduced. We manage surcharges these days a month in arrears. When the indexes go down in the various countries, we'll drip the surcharge the following month.
It would have been nice if we could have dropped the surcharge six months later. Unfortunately, that's not the way the world is working. Some places it's three months in arrears. Generally, it's one month in arrears. The contractual indexation, you might recall that we have a number of contracts, Long-Term Agreements where we have indexation there to inflation for labor and energy and all kinds of things. They typically lag six to 12 months. What happened in the last half is the major customers that we have in this area, cognizant of the fact that energy was through the roof, basically gave us out-of-contract price increases. Okay?
If we thought that the LTAs, Long-Term Agreements, were going to be a following wind in 2023, I would call it more of a following breeze, because we got a lot of it already in there. As we go forward, as the nil margin surcharges, 'cause remember, we're not taking any profit on these surcharges, as they unwind, they impact revenue but not profit. That will drive margin expansion. On the price increases, they include profit, and one of the questions people have asked me is, "Well, are you going to give them back?" The answer is no. They're enduring, and they are permanent. Now I'll hand you over to Dominic.
Thank you, Stephen. Good morning, ladies and gentlemen. Chart eight summarizes the group's financial results. Revenues grew 20.8% at actual rates and 17.3% at constant currency. This differential reflects the positive impact of a strong dollar, partially offset by other currencies which weakened against sterling, notably the euro and the Swedish krona. At the profit level, the currency impact was marginally negative overall, and this reflects the fact that our euro and Swedish businesses have higher margins than our U.S. dollar business. While we're on the subject of exchange rates, as we stand today, and as Stephen's already alluded to, we would expect currency at the profit level to be a marginal tailwind during 2023.
The other obvious thing to highlight is the group margin, which fell marginally to 15.1% in spite of the significant increase in headline operating profit. As Steven has already covered, this is entirely down to the implementation of the nil margin revenue surcharges which covered the energy cost inflation experience. Underlying margins improved, and I'll come back and cover that again later, and I'll also come back and talk about cash flow on a later slide. Given the increased profitability and earnings, the board has decided to recommend an increase in the final dividend from GBP 0.138 to GBP 0.149. An 8% increase in the final dividend and bringing the total dividend for the year to GBP 0.213.
Given the improved earnings, we're back now above the two plus times cover that we target for dividend cover. Chart nine is a new chart showing the revenue bridge. Steven's already covered how we've been managing cost inflation, but we thought it would be helpful to split the permanent price rise impact on revenues that Steven's already talked about from the impact of the energy surcharges. In this slide, you can see that the permanent price increase is GBP 33 million there, boosted revenues by a little over 5%, while the GBP 44 million contribution from energy surcharges boosted revenue by a further 7%. When projecting forwards, clearly, in light of the continued high levels of general cost inflation, you should anticipate that we'll have further permanent price increases in 2023.
Depending on one's view on how energy costs will develop, you might expect the overall impact of the energy surcharges for the full year to soften somewhat from the GBP 44 million that we had through last year. As I say, that all depends on how those costs develop through the year. Chart 10 here shows the traditional headline operating profit bridge. In spite of the high and increasing levels of general cost inflation that we saw through last year, we once again covered the impact of general cost inflation with price increases as we have done every year going back to 2008, 2009, I believe. Once again, we saw a decent drop-through above 50% to the bottom line from the revenue, volume and growth mix. The P&L also benefited from lower BIC charges, from lower share-based payment charges.
This is something I wanted to spend a moment on and highlight. The charge for the full year was only GBP 1.6 million in 2022, and that's GBP 3.4 million lower than the 2021 charge of GBP 5 million, reflecting the fact that the payout for the schemes in flight is projected to be well below target. The expected charge for a normal year, in inverted commas, and we haven't had many of them recently, would be somewhere in the GBP 6 million-GBP 9 million region.
As we hopefully in 2023 look forward to a year when the global macro environment isn't experiencing another pandemic or another supply chain crisis or another cost of living crunch, each of which has in turn impacted the outlook for the last several years, then that GBP 6 million-GBP 9 million charge is the sort of level that we would expect the share-based payment costs to return to. You'll want to take this into account when projecting forwards and estimating what you think our outlook for 2023 headline operating profit will be. We clearly enjoyed the full benefit this year of the 2020 restructuring and the cumulative GBP 30 million annualized permanent cost reduction.
Obviously, while we didn't see these items have a negative impact on the half two results, the half one energy surcharge implementation shortfall and the costly impact of demand volatility that we saw in the second quarter of the year still ended up having an impact on the overall full year result. Chart 11 goes into a little more background on the margin. It shows that if we adjusted purely for the dilutive impact of the energy surcharge revenues, our net margin would have increased to 16.1%, demonstrating underlying margin improvement. Just to stress again, I think Stephen alluded to it, but that figure, that 16.1%, doesn't include us adjusting for the GBP 5 million surcharge implementation profit shortfall that we had in the first half. That shortfall we would not expect to recur.
As automotive volumes recover and civil aerospace revenues maintain their upward trajectory, we still fully expect to see group margins move above 20% in due course. Chart 12 shows the divisional split. AGI profits are actually already back above pre-pandemic levels. This is in spite of the fact that automotive volumes are still well down on the levels that we were seeing in 2019. This really demonstrates again the benefit of the restructuring cost savings from the 2020 restructuring program, which was itself focused on AGI, and within AGI was also particularly focused on the European AGI business.
ADE profits grew as civil aerospace business improved, we expect to see continued growth as the civil aerospace market benefits from the structural growth that Stephen's going to talk about a little bit later on the relevant aerospace and events slide. Chart 13, once again, we've seen strong underlying cashflow performance. Actual revenues in the last two months of the year were GBP 25 million higher than the equivalent period last year. Essentially, this explains the entire working capital outflow in the year, as we typically have outstanding trade receivables about two months worth of revenues. Obviously, the revenue uplift was fueled by energy surcharges which were at their highest level during the final quarter as well.
It's worth stating explicitly, I've already implied it, but stating explicitly that there haven't been any issues collecting our debts, and the days sales outstanding actually improved slightly during last year. You can also see proof of this, the fact that it was a relatively unusual working capital outflow occasioned by the price increases in the energy surcharges because the half two free cash flow was actually GBP 7 million higher than the comparable half two cash flow, free cash flow in 2021. Adjusting for the unusually high level of working capital outflow, the underlying free cash flow was GBP 110 million, and that's at around about the 100% free cash conversion rate that we would anticipate seeing in a normal year. Chart 14 is just a reminder as to how we use our free cash in order of priority.
Supporting profitable organic growth, paying ordinary dividends, investing in acquisitions aligned with our growth strategy, and finally, returning any excess cash to shareholders. Finally, chart 15 takes a look at the balance sheet. Net debt came down to GBP 33 million after paying GBP 39 million of dividends during the year. We've got plenty of liquidity, and we have still more than four years to run on our revolving credit facility. Headline tax rate of 22.3% was in line with our guidance. Very much everything in line here and plenty of optionality on the balance sheet. Now I'll hand back to Stephen.
Thank you, Dominique. Going into the business review here, top of the agenda in terms of the business review is I'm gonna talk about sustainability and in particular, carbon reduction and climate change. You can see our general stats up there, but one of the big things that we're focusing on is our carbon reduction program. We are signed up with the Science Based Targets initiative. We have a target to reduce our emissions by 28% by 2030, and we're investing in order to do that. Important point to make at this point is that our investments in carbon reduction have financial returns, not just carbon returns.
If you move on to an item which not many people are talking about, except a number of our shareholders are very keen on this, is Scope Four. Not many people are familiar with that yet. Scope Four is basically avoided carbon. Avoided carbon means where we, as an enabler, can reduce other people's carbon, and that's actually a very strong part now of our sales and marketing toolkit. The fact of the matter is that we have a natural advantage over people that might do it themselves. Don't forget, at the end of the day, our biggest competitor is our customer. Because they could elect to do it themselves.
There's a natural order of things because they only produce for their own, their consumption, they're far more volatile than we are because we aggregate from many different customers. As a result, our utilization is much higher than theirs, and that's a factor which we'll come to later, when we see how this works. We have a lot of expertise. I mean, that's another point here. This is our core business. This is what we do. If you're producing a car or an airplane engine or a plow shear, you aren't really an expert in this area, I would suggest, because you've got 50,000 other things to worry about. Let's just take that forward and see, well, how have we been doing so far? Because this is not something that we just invented yesterday.
We've been on this case for quite a while. How are we doing in terms of reducing our own emitted carbon? On chart 16. Is it 16? 18. These are our five-year trends for carbon emissions. I would far prefer to use the top one, which is our total carbon emissions. It's not weighted to sales. That's because when you weight things with sales, in other words, the sales intensity, you get all kinds of funny results. If you end up actually going the wrong way on your sales, going down, for example, your carbon intensity goes up because it doesn't normally vary with sales. What's really important, obviously, is to bring your total carbon emissions down, and that's something that we've been doing pretty well with, and we would expect them to keep going.
Clearly, we've got these targets from, with the SBTI, and we believe that we're well on train to follow that. If I just move then on to something which I talked about, Scope Four, carbon avoidance. This is a real-world example. This is one of our customers in Scandinavia. And you know, the end result, and you can see it at the bottom right of the slide, is that when they were making a make/buy decision, which is quite important in this area, they decided to buy from us rather than do it themselves. If you can save a customer 45% of their carbon emission, and they're in Scandinavia, where these things mean a lot more to them at the moment than other parts of the world, they're very focused on carbon reduction, that's quite an achievement in my book.
Can you imagine what we would do with somebody in America or China? Just to very quickly explain the slide, I don't intend to go through it in a lot of detail because this is unfortunately a combination of a whole slide deck for one slide, so we're not going to spend a lot of time on here. If you want to go through it, please, you know, talk to me later. Basically, on the left-hand side of the slide, you've got the contribution of all the different elements to carbon emissions, and there's a whole slew of them that you get better carbon footprint just because we're running at a high utilization. You know, so the big arrow in the middle is that's all about just improved utilization.
You can see for each element for this customer what those reductions meant. If you add on top of it, that was 28% of the total. If you then add on top of it, items where our expertise comes to play, in terms of how you pack components, how you run gas supplies, all these kind of things, that added a further 17%. You've got a total of 45%. In general, we would expect to be able to save up to 60% of people's carbon footprint. Where are we at the moment with this? I will tell you that we're getting quite a bit of traction in parts of the world, but you would be shocked, you know, in terms of...
We've got thousands and thousands of customers all around the world. As I, as I mentioned, Scandinavia is on one extreme. You would be shocked the number of people still that can't even spell carbon. I was going to say this is a slow burn, but that's a little bit of a pun. It's certainly having an impact, and we are certainly seeing contracts that we're getting that we would not have got if we weren't using this. I'd like to move on to Specialist Technologies now. Clearly, I mean, this year, we're demonstrating that we're outperforming. A point to note in Specialist Technologies is that we did buy a very small HIP business at the end of 2021. It didn't come with any profit. It only came with sales. That is in those growth numbers. Okay?
Looking at Specialist Technologies, in a bit more detail. What we've done this year is we're actually trying to spell out more detail in all these following charts with these Marimekko slides on the right. You know, the chart, the graphs ona the right. Specialist Technologies are kicking up that small green bar. For those of you that are color blind, it's the light gray bar. That small green bar in 2022, those are the surcharges. Okay? Overall in this business, it's really getting traction. You can see the spread on the right-hand side graph of what Specialist Technologies is exposed to across the piece. We'll come back to those specific markets with some further slides, and you'll see, you know, where these growth are going.
That Specialist Technologies is, some of you may be surprised, quite well established in general industrial. The energy surcharge in Specialist Technologies is inherently less than it would be in Classical Heat Treatment because Specialist Technologies are inherently lower carbon footprint technologies. It's one of the things that's helping people switch over, as well as the completely unique offerings in some of these technologies there. Remember, these are high margin, high growth technologies. emerging markets. Same format. You can see such higher surcharges in emerging markets. You wouldn't believe the energy costs in Eastern Europe, and in, you know, Mexico, places like this. Not in China, but Eastern Europe for sure all the way down through Turkey, massive energy spikes. We completely covered it with energy surcharges.
If anybody thought we couldn't do this, emerging markets is an extreme example we don't have a problem. 13% volume growth in second half year. That was an automotive recovery in Eastern Europe. We've now started inking long-term agreements for electric vehicles. This is, you know, one of our target areas. Electric vehicles, it's quite an interesting situation. We always knew the geographic footprint for EVs are likely to be in the emerging markets. The problem we've had is in terms of getting actual revenue. These electric vehicles, what they try and do is initially start them up as a, as a process, as a product line, and then they deploy them into the production area.
An LTA for us in EVs, of which we've got some going down right now in Eastern Europe, it won't actually produce revenue for three years. That's how long it takes to ramp up these new product introductions. China obviously has been affected by the lockdowns, but that is now easing. Looking at aerospace and defense. This is an area where we do have very good visibility. I mean, I think it's pretty clear that, you know, this is an area where you can see far forward. In the civil aerospace, excluding surcharges, our revenue went up 19%. If you look at the underlying expectations going forward, it's for very robust growth in aerospace and defense. We do have long-term agreements where we're sole source, and it's civil aerospace, not aerospace and defense. Sorry, my mistake.
We've got long-term agreements. Many of them we're sole sourced on. We would expect this area to do very well off into at least the medium term, if not longer. We secured a number of long-term agreements, specifically on the A320. We're still expanding share in this area. Let's move on to what I would like to call the joker in the pack. Automotive, where is it going? It's quite hard to say. One of the things, if you look at the results announcements for various people around the world, some of the OEs, a lot of them are very bullish on 23. I would caution you, though, most of those results, sorry, those bullish statements are about their free cash flow and margins.
They aren't about the number of vehicles they're going to produce. You have to read very carefully. If you are relying on IHS forecasts and the rest, don't forget, I'm not sure how accurate those forecasts are historically. Automotive is an unknown. We're only very early in the year on it. Where it's going, we don't know. What we do know is consumer demand, there's a lot of it. We are being briefed by the automotive OEs that, you know, expect growth. It's just not there yet. When you look at our year-on-year growth excluding surcharges, you might say, "Well, how come it's down? How come it's -1%?" Please be clear, we had a very strong comp here in the first quarter last year, and it's only accelerated in a weakness and then flattened out. Okay?
It's basically flat. You know, Dominic can explain that more. The electric vehicle side, we're quoting more and more of it. Today, we don't have much revenue there, but it will come through. General Industrial. We've laid out the different market segments on the right-hand side here. Same format otherwise. I would suggest that the growth we've seen here is well above industrial production. Don't forget, our GI is really our proxy for industrial production. You can see we're really beating that. One of the reasons for that is we've actually deployed a lot of new sales techniques and marketing, and that's helping us a lot. The other thing, of course, is that we've got a growing percentage of Specialist Technologies.
That's, you know, so kicking it in as an afterburner there. It's broad-based. There's no real differences in geographies, excluding China. China is an anomaly here for 2022. Who knows where it's going in 2023, but 2022, China is an anomaly. The energy is now included in here, and you can see our exposure to oil and gas, which we have none on our energy, in terms of supply to us. We don't use oil. In terms of what we sell to, oil and gas is quite a small part of our business these days. Our exposure to actual fossil fuels is quite low. When you look at the growth in this segment, it's not coming from oil, okay? Please be clear.
The one thing that I talked about before was tooling, and tooling is a leading indicator, as I've mentioned, for automotive typically. What have we seen in tooling? We did see it growing. Its growth has, you know, petered out a bit. It's still growing, but that's expected. Tooling will typically lead automotive unit production, car and light truck, a lot of it, by about six months or six, nine months. That would suggest, that's an indicator suggesting, well, a lot of the manufacturers were thinking that there's gonna be an increase there 'cause clearly the automotive supply chains have eased a lot. That's positive. The one negative piece in here is you see that segment industrial machinery, it falls into two broad camps in terms of machine tools.
One is forming machines. Forming machines is related to automotive mostly. Cutting machines. Cutting machines, machine tools, are actually used on a much wider basis, and they're a leading indicator for industrial production in particular. We saw Q4, a sharp deceleration in the growth. The growth didn't go negative, but the amount of growth really reduced fast in Q4. That's a little, you know, sort of warning. Why do we think it is? Some of the feedback that we've got is that people are just unsure what's gonna happen for the economy. The macroeconomic outlook is making people unsure. This is a CapEx-driven segment. There's been a hold up in machine tool capital investment.
With all these great things that are going on in all the other markets, there are a few things here that are showing, well, you know, a little bit of caution, please. Just looking about, you know, where we've been investing over the years, we've said this many times, into our higher growth markets. Particularly, that is Specialist Technologies, of course, emerging markets, and the structural growth markets of civil aerospace and electric vehicles. This is where we've really been invested. We've been doing in the other parts of the business as well, but the majority is going into this part of the business, for obvious reasons. These are a list of the expansion that we're doing, greenfield sites, capacity expansion, quite a lot going on, and we expect more.
One of the people have said to me, "Well, if you've got a bunch more CapEx, could you drive it faster?" Not just one person, but you know, a number of people have said that. Historically, it's been a problem in Asia because we couldn't get land. Property prices were outrageous. Everybody wanted property. If you've been keeping up with China, the property market's collapsed. It's now pretty easy to get a property. I can imagine in the next few years, we will be accelerating in Asia, and China in particular, in terms of capital expenditure. Not right now, but it will be fair to come. We are building greenfields in China right now, but it'll be accelerating going forward.
In summary, a repeat of where we started, just to make a point of this slide, the markets that we've been investing in, the higher growth markets, they now constitute 62% of our headline operating profit. The rest of it is obviously only 40%, and it just shows you where this business is going to. I mentioned the fact, we've got the headline, the momentum in these markets, and our carbon strategy is working exceedingly well. The 2028, our outlook, I'm not going to comment on the details here. We can take Q and A after this one. The outlooks, on the slide is exactly the same as you've got in the press release and the annual report and accounts. With that, we can move to Q and A.
Morning, gents. Andrew Douglas from Jefferies The obligatory three questions, if I may. With regards to the commentary on A320neo wins and EV wins, can you just talk to us about what's driving that? Is that customer behavior because they want more LTAs? Are you winning share because customers are going out of business, your technology's better, or ESG? Can you just explain to me kind of what's specifically happening there? I'm working on the assumption that there's tons more of EV opportunities. What about civil aerospace?
Okay. On the... Do I have to push this button here?
No.
Okay. On the civil aerospace side, when we say A320neos, we don't actually mean the platform itself. It's landing gear and engines. It's mostly engines, all right? That is really about getting more share effectively. It's being farmed out. It was in, you know, in-house, some of this stuff. It's being farmed out. We don't call that outsourcing because the aerospace industry works a little bit different, differently. We've basically picked up contracts as they put this work out into their supply chain. There's no change in behavior. It's been going fine. Interesting point here on pricing. I know a number of people have made noises about, well, it's getting harder to put price increases through, particularly in automotive and aerospace.
I would suggest in a market where you are reducing your price by getting surcharges going down, it's much easier to get price increases that are gonna stay through. If you think about the relative size of these things, our prices are very sticky. They're not something that we give away. On the electric vehicles, the answer to your question is yes, there is lots of it. The problem is when will it come to fruition?
You also made reference to sales technique changes and increased marketing. Is that anything specific, or can you just talk to us about what's happening there? Is that just more feet on the ground, better value selling? What's changed?
That's commercially sensitive.
Thank you.
I'm not gonna answer that one.
Okay. Last is the obligatory M&A question. Just you've got a good balance sheet, clearly can buy back stock if you wanted to, I think M&A is, comes ahead of that. What's the outlook for M&A please?
I think, first of all, what was it in 2022? I'll be quite clear about it. We did have a run at a couple, we didn't expect in, particularly in 2022, the sort of exuberance that some folks had for acquisitions. We failed. I mean, we weren't prepared to bet the farm on some of these things. There are still a lot of acquisitions in the pipeline, but as usual, we will keep our discipline in terms of spending.
Discipline on spend. Good. What about quality of assets in the market? Because historically you've been disappointed with the quality of them.
Yeah, I know. If you're looking in Classical Heat Treatment, they're small bolt-ons. We aren't really chasing those, but there are one or two that we would've liked for years that are now coming on the market. In the Specialist Technologies side, they are larger, and some of these businesses that I've talked about for years now are coming to market. We'll see where that goes. This whole dislocation that we've seen in the economy and everything else, it is bringing things to market that haven't been there for 10 to 15 years.
Okay. That's very interesting. Thank you very much.
Yeah. Hi, it's Stephan Klepp from HSBC. Couple of questions here. Energy surcharges. We talked broad about that. I think the main question is, as well, how it's going to unwind. As well, the energy prices came down quite strongly. You must have an internal view how the state is at the moment and what's your picture for this year. Can you give us more color on that?
I know Dominic's got some numbers on this. Let me just put this to you. How cold is it gonna be this winter? If you know that answer, you'd have a very good view.
Okay. We should assume as well that, let's say it's cold as this winter, we see energy surcharges again in 2024?
I would think we'd see it in Q4 this year.
Yeah.
One of the reasons is if you think about the amount of gas, particularly in, you know, Germany and in Europe, that we had in storage as, you know, as a continent, it was much higher than it currently is, and we can't fill it up with LNG to the same levels. God, I think it was 86% when it hit winter hit. It's now at 62 or whatever. It's virtually impossible to get it oack to the same level because there's now zero Russian gas in time for winter. My belief is nobody's gonna run out of gas, but you're bidding against China now, therefore the price is gonna be higher. In terms of, you know, some more numbers, let Dominic put some financial color on it.
Yeah. Clearly last year we had GBP 44 million worth of overall surcharges. That was, you know, well over half of that was in the second half of the year. We saw the spike stroke peak of energy costs in the fourth quarter. You know, Stephen covered in his slides. We do still buy one to three months ahead, depending on the market and what we can and can't do with buying one to three months ahead. We're still in quarter one of this year experiencing costs associated with that buying forward at quite high levels. In the first quarter, they've come down somewhat. As we move into quarter two and beyond, then yes, that element of surcharges will come down.
As Stephen says, you know, One of the big questions is, well, okay, where's it gonna be as we come out of the summer?
Just let me add to that. To be clear, energy surcharges are always positive, not negative. All right? They won't go below zero.
It ties into my second question. I mean, you're alluding to in your presentation that 20% margins are in sight, and when you're alluding to that, obviously surcharges play a role. Are you referring to reported? Are you referring to underlying? What timeframe is, I think you said in due course?
Right. Let me answer that. This is a road we've been on before. We kind of hit the brick wall in 2018 to 2019 when COVID hit. Historically, take searches, surcharges out of the picture, we would expect between 1%-1.5% margin expansion a year. You can do the math. That tells you when due course is. It's got quite a range clearly, but that tells you.
Okay.
It's not in 2023, just...
Yeah. I think nobody has in the some numbers at the moment, but okay. Two more. On the ESG, you say you get tractions in some markets quite strongly. Can you give more color as well on markets? I mean, Scandi is one thing you mentioned, but.
Germany. In fact, you know, just two weeks ago, we got a couple of contracts where they were going to do it in-house. That's what we're talking about is it's really a make buy decision. The idea of people shutting down their business and giving it to us is a concept that really isn't very valid because it takes a lot of time for them to crystallize a decision on that, and it's, you know, it just goes on forever. Make buy decisions are happening all the time. Really the way of getting that business is to make sure it never goes in-house.
In Germany, we just two weeks ago, you know, we had two contracts in the auto world where we got them simply because we presented the carbon footprint and they said, "Okay, right, you do it.
Should we basically assume that this should accelerate over the years?
Oh, yeah.
... a year ago. Now we have a case study. Now your first win. This is going to be accompanying factor supporting as well the back, let's say, the tailwind from aerospace, et cetera, et cetera.
Absolutely.
Last one, sorry for a technical one again, free cash flow and margin. Last year you missed GBP 5 million in the first half year, you couldn't pass on those. Is it very simply that we can assume that you can recoup those GBP 5 million? We have a very low base then in the first half of the year. That should be seen as well in free cash flow, because with the unwind of the surcharges and obviously the unwind of the accounts receivables, free cash flow should be much stronger this year then.
Yes. As you do the bridge to this year, both in terms of revenue and profit and free cash flow, that GBP 5 million, all things being equal on a standalone basis, would unwind.
the accounts receivable? Yeah.
The accounts receivable wouldn't change because the accounts receivable on a full year basis is what did we sell in November, December? Implicitly, this is a first half thing. That wouldn't change. Over at the back. Is that Andre?
Thank you. Yes, it's Andre from Credit Suisse. Thanks for taking the questions. Can I just pick up on the ESG and that outsourcing theme? We have been kind of talking and tracking that closely, and I appreciate the revenue impact at this stage is pretty limited. When you look at that whole funnel, right now, that kind of maybe the whole size of inquiries that you've received, how does that compare to your annual revenue?
I don't have that. I don't have it yet in my mind. I haven't done that calculation. I look at the number of inquiries as opposed to how much they are. One of the problem that you get with these inquiries, if you're not actually quoting to the OEM, often they're duplicated. It's not easy to see what actually is in the funnel and what is just a duplicate. I mean, I've got examples, you know, for example, in fossil fuel extraction, where you're, you know, right now we're bidding 6x in the same job. You just don't know it is the same job.
Right. I just wondered if what can we track, how we can kind of do more work on this? The market is 20% outsourced, 80% in-house. In theory, this could be really a game changer. This could be a multiple effect of.
Well, if everybody was interested in carbon re-reduction, yes. You, if you go over the pond, once you talk to a buyer and engineer, they go, "Carbon? What? What is that?" It could be a game changer. The question is, how soon will the idea that this is something they have to do take hold? It's really over time, how quickly it's gonna go. It's clearly something that will accelerate and is accelerating. What penetration it'll make globally, I don't know what it is. Hopefully, it's before 2050, okay? You know, it's clearly is how long is a piece of string. It's hard to measure, really, until you've got the business. I'm just giving you some anecdotes on it. I don't really wanna give you a number.
That's just a wild ass guess. Excuse my French. It's, you know, it is good, but I can't say when it's coming.
Thank you. If I can just change gears a little bit and talk about aerospace and defense, H1, H2 cadence. If my numbers are right, there was a bit of a slowdown in the second half in terms of organic growth, I think as year-over-year, but also when I look at the three-year stack as well, you had quite an easy comp there from 2020. I just wondered if there was anything there that we should be aware of and think about as we model H1 ,H2 2023. I think similar on margin, there was a sequential bump up in margin, but not kind of as pronounced, which I presume is revenue driven, but just wanted to dig into that a little bit.
I mean, as always with these things, you've got to go back and look at history. I mean, as we came out of 2020, there was a lot of inventory in the civil aerospace supply chains. A lot of that unwound in 2021, but not all of it unwound in 2021. There was still some hanging into the beginning of 2022. And clearly the impact of that unwind was greatest in the half, in half one of 2021, less so in half two. We'd seen some recovery through 2021. Then impacts the comps against which the 2022 halves are measuring. I don't think there's any slow down, if you like, of the underlying growth in civil aerospace.
To the extent that you're right in any event, we're still talking about very strong double-digit growth. It's all relative.
Okay. Got it. Thank you. If I may, just the last one on the internal efficiency measures. You obviously had quite a nice benefit in 2022 of GBP 10 million. I know you've done a lot of heavy lifting already, but we also talked about ongoing efforts in terms of digital adoption and kind of tools related to that. For 2023, should we think about in a kind of separate discrete item on the profit bridge from those internal efficiency measures? Or should we just roll that into the 50% drop-through ratio against general inflation?
The digital adoption, no, because that's a longer cycle issue. In terms of general efficiency issues, it's early days, but one thing I should tell you is we do have some new blood at the top. They're bringing in new techniques. I don't mean blood at the very top. I mean, in the divisional presidents. We've got some new techniques that have been brought in. Will they pay off? Don't know. One of the things that, you know, we've been looking at, and those of you that have been watching us for a while, we've talked about these two facilities that we've had in North America that have been a real boat anchor. We didn't improve them in 2022. There's potential that they will be improved in 2023, but as yet, jury's out.
Very clear. Thank you.
Thank you. Morning, it's Rory Smith from UBS. Thanks for taking my questions. Just the first one on general industrial. Now that we're thinking about that inclusive of energy, could you just remind us what you think the splits are between Specialist Technologies and Classical within that broader segment?
Do you have the numbers there? Yeah. Do you wanna ask your second question while I'm looking the numbers up?
Sure. Staying on general industrial, what the trends you're seeing for the first two or three months of this year are on the kind of more leading indicator side, so that kind of machine tool piece?
No. One of the problems is that with the statistics, the more you segment it down, the more inaccurate it is. You really can only take leading indicators from the large segments. If you read anything into, especially after two months, into something like medical or something like that, which is smaller, you're misleading yourself, you're killing yourself. The only two really that you can take any input from at this stage of the year is industrial machinery and tooling. All right? In terms of how general industrial is doing at the beginning of this year, General industrial doesn't move quickly. We're seeing exactly the same stuff that we saw in the second half of last year. It's still on the same trend. It won't move quickly. You know, it won't change direction quickly.
At some point, it will. Automotive can turn on a dime. General Industrial generally doesn't. In, in terms of the proportions within... If we're, if we're looking at energy, if I've understood your correct question correctly, energy, more than 50% of energy revenues is in Specialist Technologies. For the non-energy General Industrial business, the Specialist Technologies contribution is just over 25%. When we say energy for this, it's quite interesting. A lot of that is industrial gas turbines because Specialist Technologies is in, is in civil aerospace, and, you know, a land-based turbine is just, you know, an ugly form of a, you know, a plane engine. A lot of the IGT is in Specialist Technologies. And the oil and gas side is not very well exposed at all to Specialist Technologies.
The nuclear Specialist Technologies, renewables Specialist Technologies. That is all towards IGT and renewables. Except for subsea. Subsea is specialist technology. Now you're gonna ask us how much is that?
I'm going to ask you how much of oil and gas is subsea, absolutely. Nuclear, because I didn't see that on the pie chart either, I suspect, if I saw?
It's in the renewables. It might not be a real renewable, but we put it there.
Just if I could maybe ask a follow-up on the Scope Four chart.
Yes.
Apologies if I've misunderstood this in any way. It appears to me that you're suggesting you get 28% reduction in CO2 from a 35% increase in utilization. Is that 50%-85% your improvement or from the customer? Is that an assumption that you've made that your customer is on average?
No. The way this works is the customer tells us how. They already have a process line doing this stuff. They're introducing a new product. We went in and we did a study of their process line. We measured how they were doing it. We then came back and calculated how it would be if we did it using our utilization rates, our fill rates, our packing densities, our materials. For example, when you look at the fixtures and the jigs, they're using cast iron, we're using carbon fibre. What's the big difference? Carbon fibre doesn't pick up a lot of heat. You don't have the energy wastes. You're not spending energy heating it up and down. Essentially what we've done is study their process, come back, show them our process, and what the carbon footprint's gonna be. That's the results.
They gave us the job. Don't forget, on this carbon side, it's really a proxy for energy in many respects, and that's cost.
Brilliant. Thank you very much. It's Harry Philips from Peel Hunt. Few things please. Just an update really on CapEx and particularly growth CapEx. I mean, obviously you had the slide, splitting it out in terms of sort of momentum. Where might both of those go? I guess inflation has sort of boosted it up a little bit. Just on the Specialist Technologies margin, I mean, in the past, you very kindly split out the profit split. Maybe I've missed it, but I can't spy the Specialist Technologies margin.
If you look at chart 27, it's not there. Go on.
I shall look at chart 27.
Okay.
Just thinking about aerospace and particularly, you know, a lot of the sort of bottlenecking has been around sort of casting and forging and what have you. I'm thinking about HIP capacity, thinking about Ellison. I'd imagine the Ellison guys are maybe a bit more chirpier than they might've been back in 2020 and so on.
Why don't you take the margin point, Dominic, if you could?
Okay. Well, I'll start off with the CapEx. CapEx outlook for expansionary CapEx. You know, we've got various projects underway. We're building out additional HIP capacity. We've got projects in emerging markets, you know, but in Eastern Europe behind electric vehicles, et cetera. All in line with our strategy. It's a very difficult one to predict though in terms of timing. At this stage, I would suggest it's gonna be somewhere from a cash flow perspective between GBP 20 million and GBP 30 million this year. But it could be more. It really depends on the timing of those projects. As far as the Specialist Technologies margins are concerned, and I guess you can more or less calculate this yourselves. They're not today at 30% +.
That's really reflecting the fact that we didn't take any capacity out of Specialist Technologies because the long-term prospects for growth in Specialist Technologies is very good. What that means is that in parts of our business, particularly in HIP Services, we have spare capacity today. We're very confident it's gonna be filled in the next couple of years. We've got spare capacity today. Aerospace volumes are still 20%+ down on where they were in 2019. Inevitably, well, particularly in a business like HIP Services, where you have a big drop-through, that missing revenue if you like, has impacted profitability. Today it's in the mid-20% overall on Specialist Technologies, but it's coming back, and it will get back above 30% soon enough.
Let's talk about the capacity issue. I'll go right to HIP. One of the things you have to realize that HIP is a long-term business. You know that, Harry. We do a capacity footprint plan that's out, going out fiv, six, seven, eight, nine years. That's because if you wanna buy a HIP, unless it's already installed, like the, you know, the business that we bought in Switzerland in 2021, why do we buy a zero margin business? It's because they're great assets, and we can put that business into our assets, and we can make money out of it. Those assets have gone into our strategic reserve. They're not deployed yet.
Unless you can do that, if you've got to order a new HIP, your lead time to get it up and running, is somewhere between one and two years. If you don't forward plan your capacity, you'd be in real trouble. We learned that lesson back in 2011. What we're seeing now then is starting in 2025, with our current footprint, we will be out of capacity in various parts of the world. One of the things you saw on the capital investments is expansion of HIP capacity now. That is getting ready for it, plus the fact we've got contracts coming in, plus you've got people like, you know, Pratt & Whitney getting market share going up, and we're doing work for them. It's all, you know, contracted, look forward.
Today, it's not heavily utilized, but it will be fairly shortly in terms of, you know, years. In terms of S3P, we have no spare. That's always been the case. That's always been. We're always building S3P plants, and expanding them because as soon as you put one down, it fills up. You know, that's, you know. The rest of the Specialist Technologies, utilization is currently not great, but because of the growth rates in this stuff, especially as the exposure to the aerospace and parts of GI, it fills up quite quickly. Hope that answers your question.
Just to round off on the Specialist Technologies margin, for 2022 and 2023, the HIP business that we bought in Western Europe, the back end of 2021, we bought revenue, but we knew it was a, it was a nil margin business. As that revenue is transferred elsewhere as we shut the plant, and we'll be shutting the plant sometime this year. We'll get the positive impact of that rolling through into other plants at very nice margins, and obviously lose the zero margin in the existing plant.
Just a bit more color on that. When you add work to a HIP plant with no other cost associated with it, the drop-through is immense.
You can start thinking about 20% margins, therefore, for 2024, but.
I-
-go quite to that point, yeah.
Go ahead.
'Cause when you look at sort of LEAP deliveries and stuff like that, I mean, where are you in that sort of production cycle? Are you already up to sort of 1,700 LEAP run rate, or are you still ramping up towards that?
We cover the supply chain from castings and forgings right to finished engines. That's a two-year timescale. I can't tell you what our build rate on those things are. You can see from our sales there, where we are, you know, we're above the background market here. Don't forget, we don't just sell into the new build. We do a lot of aftermarket, and that's from sort of flying hours, RPKs. That's a very difficult question, and you knew it was a difficult question for us to answer.
Hi there. Colin Moody from RBC Capital Markets. Just a quick one. Aerospace and defense, clearly very strong civil aero. I was just wondering if you could update quickly on the defense side, how you're seeing things progress there.
Yes, that's a nice question. Thank you. The defense side is quite interesting. It got me fooled, because I thought it was going to surge like crazy, and it hasn't. What we do in defense is mostly flying assets, and actually, the surge is not really any way in flying assets. What we have seen is some areas of casings, but there's not a lot of money in that, you know, clearly. Our defense revenues are pretty flat. You know, off into next year after year, these contracts will come through. I was amazed at how long it takes the governments to actually sign off to get production going up. We haven't seen it in 2022. Don't really expect much in 2023, which I got wrong 'cause I thought we would.
Thereafter should be some. Defense isn't a big deal for us. It's only a small part of our Aerospace and Defense line.
Great. Thanks so much.
If there are no more questions. Okay. Thank you very much, everybody.
Thank you.