Ladies and gentlemen, hello and welcome to the Bodycote PLC 2021 Interim Results Call. My name is Maxine, and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Stephen Harris, Group Chief Financial Officer, to begin. Stephen, please go ahead when you're ready.
Good morning, everybody. Just to correct, Maxine, there, I'm not. I haven't been promoted to the Chief Financial Officer. I'm still the Group Chief Executive, I'm afraid. But I am here in person, and joining me this morning is, in fact, Dominique Yates, the Chief Financial Officer. We will take you through what is a nice set of results, I think, this morning. I'll just give you an overview to start with, then hand over to Dominique who goes through the financial, financial review. Then I'll come back and we'll take a quick look at the business on a broader scale, and what we've got in store for the future. So, moving on, if we look at the actual results, clearly a strong profit and cash performance.
So we had revenues up 5.9% constant currencies, and on the back of that, we had actually had profits up 35%, to GBP 48.7 million. Nice margin coming through. As we'll see as we move through this presentation, you know, very, very good set of efficiency improvements combined with our restructuring, giving us a gearing that's actually well over 70%. Come back to the margins for a second. I'm very happy to say that AGI margins are above 20% for the first time, and we'll talk about that a bit more going forward. We're delivering very well in terms of our strategy, and you'll see our Specialist Technologies and emerging markets doing exceptionally well. We've raised the dividend, and indeed, today we're raising guidance for the full year.
So, just looking at the performance very quickly in graphical terms here, you can see the revenue increase there in the first half compared with 2020, but still below 2019. And the good margin improvements, as I've mentioned, coming through from the restructuring, but also a lot of efficiency improvements. And you can see the full-time equivalent headcount there, falling. And of course, we've got more restructuring that will come through and we'll be holding these efficiency improvements going forward. With that, I'd like to hand over to Dominique, and he'll take you through the financials.
Thank you, Stephen, and good morning, ladies and gentlemen. Chart seven summarizes the group's financial results. Obviously, last year's first half comprised two very different quarters. Our revenues in Q1 this year were still well down on last year's numbers, while the second quarter's revenues were significantly up. The net result was an increase of 2% at actual rates, or 5.9% at constant currency. Stephen has already highlighted that the growth in constant currency headline operating profits was 35%, so given that that is significantly in excess of the 5.9% revenue growth, margins improved significantly from the low base of last year. And following on from that, profit before tax and earnings per share both reflect this increase in headline operating profit. Cash flow was strong again. I'll come back and talk about that later.
Given the increased profitability and earnings, the board has decided to increase the interim dividend from GBP 0.06 to GBP 0.062, which will be paid out in early November. Chart eight shows the operating profit bridge. Here you can clearly see the benefit from the strong operational leverage and restructuring on the volume and mixed result. It also shows that, as anticipated, variable pay has returned to the P&L. There's been a lot of commentary on inflation over the last months, and we've certainly experienced some energy cost inflation in some geographies. We have a long and proven track record of managing this and have again successfully passed this cost inflation through. There are some signs of wage inflation in certain geographies, as well, and as they materialize, these will also be passed on in due course. Chart nine looks a little deeper at the restructuring.
By the end of June, we'd shut 19 facilities, 14 in the AGI division and five in the ADE division. The remaining seven facilities in the program will be shut by year-end. The three plants which have facilitated elements of the restructuring program are all up and running. Cash restructuring costs of GBP 8 million in the first half are in line with the provision. In terms of results, headcount is more than 1,000 FTEs below the end 2020 pro forma headcount. This is despite business recovery from last year's troughs in many areas. We're on track to realize the GBP 20 million of net restructuring benefits in 2021, with a total benefit of GBP 30 million in 2022 as we get the full annualized benefit from the restructuring from right from the beginning of 2022.
Chart 10 shows the divisional split and, unsurprisingly, reflects the different experiences of the two divisions. AGI revenues and margins are both up sharply, while ADE's revenues and margins are down. Analyzing this a bit deeper on chart 11, we take a look at the results in a broader context. The restructuring program in AGI was already underway by the time the pandemic hit. Also, as you can see from this chart, revenues have recovered more strongly. So they were only 9% down on an organic basis versus half-one 2019. As a result, profits have bounced back very strongly and were above 2019's level, with, as Stephen has already said, the margins surpassing 20% for the first time. ADE has yet to benefit significantly from the restructuring, and organic revenues are still some 30% down versus half-one 2019.
So despite them having done a good job on cost reduction, revenues and profits are down versus last year. It is worth pointing out, though, that the 14.6% half-one margin in ADE compares favorably with the 8.6% that we achieved in the second half of 2020. Even with the benefit of restructuring coming through, if by the end of this year, we will still need some revenue recovery, though, to get back to the historic profit and margin levels that we've seen in the ADE division. Chart 12, so once again, we've seen strong cash flow performance in the first half with free cash conversion at 124%, which is really excellent. In fact, the only reason it doesn't look better than last year's is down to the exceptional working capital inflow in 2020 associated with lower trade receivables as a result of the drop-off in revenues post-pandemic.
On chart 13, taking a look at the balance sheet, net debt is at GBP 70 million, at the end of the half. This is after we paid out GBP 37 million of dividends in first half and the remaining GBP 58 million for the Ellison acquisition. Financial leverage is a very manageable 0.5x. We've plenty of liquidity, and we extended our credit facility by a further year that matures now in 2026. Our headline tax rate at 22.5% is in line with guidance. Based on current exchange rates, we'll face a small currency headwind in half-two versus half-one, but the impact on headline operating profit based on today's rates should still be less than GBP 1 million. Now back to Stephen.
Thank you, Dominique. So just turning to our ESG agenda, a note on social and governance. I think we score very highly in that area, and it's really very good. I'd like to focus a bit, in this presentation, on the climate change aspects of the business. So as we've said before, we are on the path to net-zero emissions in line with the Paris Agreement, and we're currently doing a fair bit of carbon accounting. So we're developing our science-based targets, which hopefully we'll get to sorted out fairly soon. And we are assessing and managing our climate risks, in line with the TCFD, the Task Force on Climate-Related Financial Disclosures. Our carbon reduction plans are moving ahead still. I mean, we've been doing it for some years, and their plans are progressing quite well.
A big focus for us is two areas. One is moving fuel sources to electricity where we can, and away from natural gas. That gives us the ability to take advantage of green energy when it's available. And basically, the electrically fueled processes that we use have a much lower carbon footprint anyway than the natural gas-fired processes. And actually, in the photograph there on the right-hand side of this slide, you can see a processing unit which is called low-pressure carburizing. The comparative process in classical heat treatment would be atmospheric carburizing. low-pressure carburizing is one of our Specialist Technologies. And if you saw atmospheric carburizing, you'd see very visibly a whole bunch of flames belching out everywhere. And as you can see, low-pressure carburizing is a very clean process, much lower carbon footprint.
It's definitely the way that carburizing should be moving in the future, and we're pushing it very hard. Another key aspect of our business is that it's not just about driving our own carbon emissions down. In fact, far bigger issue and far more important, probably, is helping our customers to reduce their carbon emissions. And simply put, if we can take work that our customer is doing in-house in a so-called captive, we often are able to achieve between 10%-40% reduction in the carbon footprint that they had by doing it in-house in our business. And if we can move them over to our cleaner processes, it can even be more than that. So it's a big move for us.
I have to say, not only is it good for the planet, of course, it's also good for our bottom line. Just moving through to the actual business financials and the progression in different parts of the business. Unusually, I think, for us, we're showing you quarterly progressions today. We don't normally do it because unless there are big movements between quarters, it's hard to see through the seasonal variations. But here is the group revenue progression on a quarterly basis, and you can see the shape of the recovery that we're seeing. Interesting to point out, even though we've got some recovery happening, our Q2 run rate is still 10.6% below 2019, so there's a lot more to come yet. Then just pulling that apart into the various markets of the business, you'll note, first of all, that I'm not showing energy.
Energy is now quite a small part of the business, and indeed, a number of the subsegments in general industrial are the same size or larger than energy. So I don't think it's much point in talking about it separately. But here we do see the main areas: general industrial, automotive, and aerospace and defense. The key point, I think, to take away from this slide is general industrial is recovering the best, and it's also the largest portion of the business. So looking at each one of those in a little bit more detail, general industrial year-on-year growth 9%. Showing steady growth. It's, it's actually now almost back to it's within a hair of the 2019 levels, which is good. There are no major differences in growth between territories, so this is a general growth right around the world.
It would be faster, we believe, were it not for the supply chain constraints that are out there. And it's fairly evident that there are raw material shortages and supply chain blockages, right around the place. So there is, there's some restocking going on, but not anywhere near as fast as our customers would like to do. At least that's what they tell us. Another interesting piece in the AGI business here is we look at one of the particular subsectors, which is tooling. We like to look at tooling because it tends to be a leading indicator for automotive. So what happens in tooling today happens in automotive in one or two quarters in the future. It's a pretty good indicator, generally.
I think the important point about the tooling subsector is that it stalled in early Q1, which is a little bit of a canary saying that automotive was going to slow down. Indeed, if we go forward and look at automotive, you can see here what happened. Indeed, in Q2, we started seeing automotive softening. I think going back to the tooling lead indicator again, we haven't seen any growth resume yet in tooling. And that sort of tells us that the run rate from where we are today is likely to be flat for the rest of the year. We will see, sir, a little bit of a slowdown in the summer, as usual, with summer shuts. But when it comes back in Q4, we're not expecting a net growth, particularly in automotive.
There might be a small growth, but we're not expecting net growth. And that, in fact, is backed up by conversations that we have with some of our strategic customers. We have a very good relationship with General Motors. I think most people know. And the information they've been giving us is even though there's an expectation that the chip shortage and semiconductor shortage is going to start to alleviate sometime in Q4, at the end of Q3, they're not expecting to ramp up production that quickly because they've got to get the supply chains moving. So it doesn't happen overnight. So when the semiconductor situation does start to ease, we're likely to see the growth in automotive resume in 2022. And the information that we received on that is, quite frankly, be prepared to do a lot of work.
And the reason for that is that demand is strong, and supply is short of the demand area. And what the OEMs want to do, of course, is to catch up. And so they're expecting to provide a lot of work in 2022, and we should see that come through to us, quite nicely. Turning to aerospace and defense. So this is 25% down, year-on-year. Not unexpected. There's a slight improvement in aerospace and defense. And that is not really yet about plane build. It's new plane build and new engine building. That's mostly driven by flying hours producing demand for spares. And so we're yet to really see the impact of new engine build, which is where our major exposure is. And of course, it's now mostly on narrow-body engines.
There is one green shoot that we've got there, though, that tells us that our assumption, which has been all along, that we'd see the turn up coming in 2022, and that is those parts of our business that are closest to the final assembly of the engines, such as Ellison, which is the acquisition, of course, that we bought at the beginning of last year at the end of Q1. They're very close to the end of the production of the engines, and their business is actually up 9% in Q2. So that's good. And we also are seeing it in the piece that then is in our Northeastern aerospace business. And that's starting to turn up too. And once again, that's right at the end. And so there is a lot of inventory, though, in the supply chain.
And as the engines start getting ramped up, what we will see is that imagery being burned off, and it will spread throughout the entire business. So overall, no meaningful upturn at the moment, but we are expecting, and, indeed, our customers are telling us to be prepared for a very strong ramp in 2022, particularly on the narrow bodies, of course. Just turning our attention to the emerging markets. This is, of course, one of our, key areas for strategic expansion. Very pleasing. We got a 36% emerging market growth, whereas in, Western Europe, it's, 16%, growth in, North American general industrial, automotive and general industrial. And this business is emerging market is primarily automotive, I'd like to point out. I'd already told you that there's not much difference between the territories and the general industrial growth, but in automotive, there is.
And you're seeing that coming through in the emerging markets. Very good business. The other thing I think people should take note of here is the margins in our emerging markets are 25%. And so we often have people say, "Well, it's great to grow in China, but the margins aren't so great." Well, that's not the case for Bodycote. In Bodycote, our Chinese margins are actually above 25%. It's a very good business for us. And we're keeping our expansion going in emerging markets, and there's a lot more to come there, as we can get the capacity in place. And then specialist technology is another main thrust for our strategy. Specialist technology is contributing 43% of group profit.
If we look at the two different pieces of Specialist Technologies, if I can call it that, there's the AGI-focused Specialist Technologies and the ADE-focused technologies. You can see from the chart that the AGI-focused technologies revenues are up 42% on 2020, and that's compared with a background 14% increase in classical heat treatment, in those AGI markets. Whereas ADE, where we've seen the aerospace weakness, the Specialist Technologies have declined 13%, but that is quite a lot better, of course, than the 23% drop that we've seen in the classical heat treatment revenues for those market sectors. So Specialist Technologies really pulling ahead, great margins, great growth, great future. If we look at then just as in summary terms, at our business looking at it through three different angles.
One is the, the markets, and you can see on the left, the growth rates, and the actual revenues of each of our markets there. And then in the geographical splits. And then, of course, on the right-hand side, the technology splits. And you can see quite clearly from this, if you look at the growth versus 2020, down at the bottom of the chart, emerging markets growing 36%, Specialist Technologies growing 17%. So clearly leading the leading the way, which is very nice with margins that are above the group average. Just coming to strategic progress then, talked about the Specialist Technologies. They continue to go apace, and it's good growth. And our emerging market strategy is, is doing really well. It's excellent. And we're well above 2019. We are increasing our, our focus on supporting production for electric vehicles in the emerging markets.
I'm happy to say that we've actually got a couple of greenfield projects at the moment that we're working with customers on to finalize that are specifically for electric markets. The civil aerospace narrow-body program continues to evolve. That is another part of our strategy. We used to invest much more widely in civil aerospace, but in recent years, we've focused on narrow-body. We anticipate strong growth in 2022 as that business starts to come up quite fast. Going back to the cost savings issues, the restructuring program is doing well. But also we've got excellent efficiencies at the moment, good cost management by the various teams around the world. So the business is really taking a turn into the higher quality end again. We expect now the group margins to be over 20%.
I think this is the first time we've written it publicly, even though we've talked about it. And that's where they're trending to do too, at the moment. And of course, that's unsurprising. You have specialist technology margins that are around 30%, AGI margins now above 20%, and ADE margins always used to be in the low 20%s. And we fully expect it to get back there, as the revenues come back. So in summary, once again, profits up 35%, on revenues up 5.9%. Restructuring going well. I just, a quick mention. It's not part of restructuring, but it is part of the kind of work that's going on. The Ellison acquisition is being integrated very well and starting to hum, as it were, in line with the rest of the Bodycote business. Good production efficiencies with gearing of more than 70%.
I think some people looked at me in the past when I said we'd have gearing above 70% with sort of strange looks at me. But here it is. This is what we do when things go well. Excellent cash generation. And we do expect growth to start accelerating, once these short-term supply chain issues have been resolved and the aerospace business starts to ramp up. And faster growth when it comes will disproportionately benefit the bottom line. With that, we come to the outlook statement. This is the same as you've seen written in the press release, just pointing out the obvious that we actually have upgraded our guidance here on the back of our first half results and what we anticipate for the second half. With that, we'll move to questions, please.
If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted. Our first question comes from Michael Tyndall from HSBC. Your line is now open.
Morning, gentlemen. Thanks very much for taking my questions. Two or three, if I may. Can I start with specialist tech in auto? Seems to be very strong growth there. Certainly got you far above where the, the overall auto production is. Can we talk a little bit about what where you're being adopted in autos, what's it displacing, and is there a saving for the end customer by using the technology that they're using in specialist tech? Second question is just around efficiency gains. You mentioned that you're going to hold them. How hard does that get in next year when you the growth comes through, as you were mentioning, both in auto and aero? And then the last one, bit of a recurring theme for me. On the ESG side of things, you're putting together your, your science-based targets. So are most of your customers.
Are we seeing any movement in terms of the trend towards outsourcing as ESG becomes very much front and center in the mindset of your customers? Thanks.
Thanks, Mike. Yeah, I'll take those. So the Specialist Technologies. Yes. So, I think answering the second part of your question first, which was, what do the customers get out of it? And they get a few things. The first thing that they get is that while the price, if you like, that they pay us is not any different from what they would pay for atmospheric carburizing, for example, or other substitutes that they would be using. So the immediate price of the work that we're doing doesn't change a whole deal. But what happens is because the processes actually produce cleaner parts, less distortion, they have less on-costs. So in other words, their further processing work that they might do in terms of straightening our components or cleaning them or whatever is reduced.
And indeed, it allows them to design and build thinner parts anyway, because of their lower distortion processes. And that saves them material costs. So they might not be paying us any less, but they certainly are having a lower-cost solution and, in fact, a higher-performance solution. And that is the main reason for adoption. They are going well. But this is, you know, this is the culmination of a lot of work. It isn't just something that's happened by chance. And I think it's quite pleasing for our teams to see what the results of this. Going on to the ESG side, I'll come back to efficiency. So it's quite interesting because we didn't get much of an audience when we started talking to customers originally a few years ago about the environment. I mean, it was deaf ears.
And then we started getting some interest in Europe. I think the piece that surprised me is that we've now got quite a positive take in North America, which really shocked me, in fact, because, you know, there, there they didn't seem to be any attitude towards it. But now we are, quite recently, with customers talking about carbon reduction and quite surprised to see how much carbon can be reduced, and what it does for them. Because a lot of these guys, of course, if they've got a captive heat treat, it's probably their biggest energy use by far. So tackling that is a big one for them. And there are some interesting conversations going on on there with some very large customers. But I wouldn't say it's that widespread. It tends to be the larger customers that want the conversation. The smaller ones aren't there yet.
If you're talking to the engineers in particular or the buyers, they're definitely not there. So it's the bigger customers driving that attitude. I fully expect this to increase the rate of outsourcing, which, yeah, I think, as you may know, outsourcing generally is a slow trickle and has been for many years. It's still going that way. But I expect it to increase as the years go by here. Last, efficiency gains. How hard are they to hold? It really starts happening when you reach the point where you have to put on an extra shift or you have to put in more equipment. Then you find your efficiency falls back a bit because you end up with underutilized resources at the early stage. Now, we have a lot of capacity, at least in the developed markets.
So I think that particular piece is some way away. But what we will start seeing is more shifts coming on, as the plants in the developed side of the business take more business with growth. I would expect to hold our efficiencies, at the very least, through into next year. And then, you know, we'll see. But I don't think you can achieve gearing operational gearing of over 70% all the time. It's gonna come down to a more natural 50%, as we move forward in time. I hope that long answer answered what you were after.
No, no. It's perfect. Thank you very much.
Our next question comes from Maggie Schooley from Stifel. Your line's now open.
Morning, Stephen. Morning, Dominique. Thanks for taking my question. This is just a little bit more of a longer-term question. I think it's very interesting what you were talking about in terms of your movement to an ESG and electrification, and how that plays into your Specialist Technologies. But as you push these technologies and clients gravitate toward them, can you give us an understanding of the changing shape of your business over the next couple of years? So what I'm trying to get a feel for is, for instance, could you think the operating profit split from classic heat treatment to Specialist Technologies could flip-flop?
Yeah. Obviously, these things are always a split in terms of how the different parts of the business perform. And clearly, we still expect the classical heat treatment side of our business to perform well. And as we've seen in the first half of this year, it has performed well, you know, particularly on the AGI side, and grown margins significantly. But I think more generally, it is absolutely part of our strategy to see that Specialist Technologies revenues will outperform the classical heat treatment revenues. They are at a higher margin. And naturally, therefore, over time, all things being equal, acquisitions aside, etc., we should see Specialist Technologies as a percentage of the revenue and of profits rise over time.
Makes sense. Then when you think about securing more renewable technologies, have you had any traction with securing PPAs? 'Cause those are with the renewable providers for where you need it because those are actually quite sought after and, from what I understand, quite difficult to negotiate. Are you just starting that process, or is that something that is?
You know, you didn't come through very clearly there, Maggie. Could you just say that again, please?
Sorry. I was just thinking also in securing a more green mix of your electricity, have you had the opportunity to have a lot of negotiations on PPA agreements to secure renewable electricity where applicable, or is that still very much in the early processes?
Yeah. Well, I think the short answer to that is no, we haven't. You know, we have a lot of green energy in places like Scandinavia where it comes from hydro and France where it comes from nuclear. But in terms of actually getting agreements from suppliers to just have a portion of green energy from them, early days yet. We're not at that.
Okay. Thank you. I appreciate the answers.
Our next question comes from Jonathan Hurn from Barclays. Your line is now open.
Good morning, guys. Just a few questions for me, please. Firstly, can I just talk about labor? I think if we go back to Q1, you said you were seeing some labor shortages. Has that continued through Q2? If so, which plants are really being affected by that? And do you think that can unwind in the second half and maybe start to see some pull-through of essentially a backlog, which probably built up from the reduced labor? That was the first one.
Okay. Let's take them one at a time then. So, the labor shortages we've seen were primarily in North America, in very specific states, actually. And they are alleviating a little bit, partly because we've taken a different approach to recruiting. But there's still the labor market there is very tight. And that's interesting for the future because it's not that our labor force is inflating at the moment there, because the vast majority of our folks have an annual pay increase, which we're, you know, well away from at this point in time. But we are seeing an intake of folks that we're having to attract with slightly higher pay. And that's giving us the sort of forewarning of inflation, which is what Dominique referred to earlier.
That, of course, will come through then as we start pushing our price increases to different customers. So that's where the main issue was. There's also some areas, for example, in Eastern Europe, where there's some labor shortages, and they are fairly immediate. We can solve them, but we end up bringing in folks from further afield. So it's not cataclysmic by any means. I know a lot of companies that are in much worse shape than us, but it definitely is there.
Great. That's very helpful. Thank you. Second question is just on Ellison. Obviously, it's where it sits in the cycle, it's quite early cycle. You've said that performance is getting better in Q2. Can you just sort of give us a feel for where profitability of that business sits right now and how we think about that profitability developing sort of second half and into 2022 as well, please?
Well, I mean, as you can see from the headline operating profit bridge, it is not contributing in a very significant way to group profit. But it is nonetheless doing better than it was a year ago. I think the key points that we're trying to get across there really is that, from an operational efficiency perspective, it has improved significantly. All things being equal, given the revenue decline it suffered, one would have expected it to be making losses, and it's making profits.
And as the revenue comes back, we fully expect the gearing in that business to be very good, and therefore the profitability and margins to improve to, well, the margins to improve beyond the levels that were in our base case assumption when we bought the business 'cause we I mean, there was always potentially some operational efficiency upside, but we didn't build that into the original model. We think we're achieving that already. We just need the revenue to come back to drop through to the bottom line. And that business should get up to specialist technology margins in due course.
Great. Thank you. And then just the final question, maybe just sort of a little bit of a longer-dated question. But obviously, if we look to 2022, obviously, you're saying that aerospace will recover. We start to see auto volumes bounce back. You've got another GBP 10 million of cost savings coming through in 2022. Does that is that year the year that we potentially could hit that 20% margin target that you referred to earlier? Do you think it's 2022 is a possibility for that?
I'd like it to, but I'm not gonna forecast it, that's for sure. But, it's something I've been working on for a long time. But, we'll see. We'll see. No promises, but we'll see.
Okay. Thank you, guys. That's appreciated.
Our next question comes from Andrew Douglas from Jefferies. Your line is now open.
Good morning, gents. Most of my questions have been answered. However, I've got one on emerging markets. Are you able to paint a picture for us, of emerging markets growth over the next kinda couple of years? And I appreciate it's gonna be market-led, but in terms of things that you can influence in, maybe, give us a feel for how many new sites you can add, every year for the next, I don't know, 3-5 years. And you talked previously about China and maybe buying some land strategically. Is that still an opportunity? Is there anything you can do to push forward the emerging market story given the growth and the margins? And then, secondly, just on M&A, just thoughts on the M&A opportunities as we kinda sit here today. Clearly, the balance sheet's in good nick. Just wondering kind of thoughts there, please.
Yeah. Morning, Andy. Emerging markets growth. So I think the one thing to remember about our emerging markets—these plants typically are ones that are more modern than our other facilities, and they're large. So, you know, there tends to be a lot of floor space, particularly as land in the emerging markets is a lot cheaper than it is in the developed markets. And so we built large facilities there. So the initial part of the growth is actually filling out the space in the existing plants. I know, you know, we've got in Mexico at the moment one of our newer plants there. We're just about to fit out another hall, effectively doubling the used space in that facility. And that's the kinda thing that we're pushing forward on. It's relatively straightforward to put greenfields down in most of the emerging markets. As yet, there's nothing to buy.
So, you know, we're, we're pushing ahead, for example, in Hungary. We're looking at another plant in Hungary. It's all very straightforward. It's really getting the negotiations with the customer sorted because when we build a greenfield, we don't do it on spec, as it were. What we do is get an agreement with an anchor tenant, an anchor customer, as we call it, that underwrites the initial investment. And then we can add to it, as the business, it gets starting up. But basically, Eastern Europe, no problem in terms of new greenfields. Mexico, no problem in terms of greenfields. And indeed, we have space in the plants that we've got to expand. So that comes to China. The Chinese facilities do have some capacity in terms of floor space, and we are filling that out as fast as we can.
That is held back, as I said, people constraint in terms of project resources. But we're going, you know, we're going pretty fast there. We are looking at the moment at another greenfield in China. And I have to say, it appears as if the real estate situation is starting to ease a little bit. Maybe we're just getting a bit smarter about how to do it. But it is easing a bit. And some of the municipalities are now fighting to be able to give us capacity. Whereas when there was massive growth in China in these areas, they really didn't wanna talk to us. Now they do. So there is some capability there. And we are still looking at our acquisition strategy to get sites as opposed to businesses. So I would expect.
Yeah.
Talking in terms of new sites going down is less helpful, but because we will be expanding in our existing sites as well. So the kinda growth rates we're seeing at the moment, I don't see a problem with keeping that up for a few years, in terms of capacity.
Super. And M&A?
M&A. Perennial question, M&A. There have been quite a few PE assets that have been, you know, traipsed around the place, some of them a lot more moth-eaten than you would expect. But we haven't bitten on any of them yet. We could we continue to look. We're always open, but nothing that, particularly, you know, sort of gets your, your juices flowing yet.
Is it fair to say, just to follow up there, that the quality of the asset is better than it was maybe 12, 18, 24 months ago, or is that not fair?
No, it's not better. It's worse.
Worse?
I mean, the stuff that we're looking at now, I mean, they haven't actually done a great job with them, frankly.
Okay. Okay. That's really kind. Thanks for the insights.
Our next question comes from Celine Fornaro from UBS. Your line is now open.
Yes. Hi. Good morning, gentlemen. Thank you for taking my questions. My first one would be regarding the comment you made on the aerospace and actually providing some color on the mix of the business. So saying that aftermarket you think is recovery or that is what is driving your recovery compared to an OEM. And I think in the past, you've generally said that it's very hard for Bodycote to differentiate where the part goes. So how come, I would say on this instance, you're able to see that? And also, is this mainly driven by narrow bodies, or you also have a pickup in wide bodies? And then my second question would be on the summer shutdowns and particularly on the, I would say, automotive sector.
Shall we expect them to be a bit longer than usual, because of the supply chain constraints, or, or not? Thank you.
Thank you, Celine. So if we just address your questions within aero, a good question. So the split of the business works like this. The narrow-body engines come out of General Electric and Pratt & Whitney. And typically, General Electric does a much higher percentage of repair work in the aftermarket than new parts. We don't have a huge exposure to Pratt & Whitney. So GE has a much larger percentage of repairs. We don't participate in the repair market. What we do is to process components that are new components that could go into a new engine or into a serviced engine. And so there you can look at Rolls-Royce. And Rolls-Royce have had a new-for-old policy for a long time. They don't do repairs to speak of on blades and the like.
What they do is that they replace the parts with new parts. And as they control the Power-by-the-Hour mechanism where they're controlling the service records of these engines, you know, they are driving that. So where we can see it is we know the engine build rates out of Rolls-Royce, which are not really growing anywhere at the moment, but we can see that their business is going up. And so we conclude from that that that's driven by flying hours. And in fact, that's backed up by anecdotal evidence around the place as well. So that's one piece. There is also some work. And you can tell not by the split, but the type of component that's being produced. If it's a wear component and that's going up and the non-wear components are not going up, then you conclude from that again that that's probably the aftermarket.
That's how we look at it. That's why we know aftermarket is growing, is what's growing at the moment. We also talk, you know. We have schedules out of these, or schedules, I should say, in the U.K., out of these OEs that tell us what their rate of build is going to be so that we get a good future view from them, best insight we get actually in any of our businesses. The amount of engine build is not occurring right now. So once again, it's from the aftermarket. But for us, of course, it doesn't matter. From a profitability standpoint, the price of a new component versus an aftermarket component from us is identical. I hope that answers the question on the aero side. If it doesn't, let me know.
Yes. Sorry. Just yes. It does. Just to clarify, so you think the pickup at the moment for you is more on the wide body given all this wide aftermarket detail exposure that you gave, right?
It is a little bit more on the wide-body. It's, it's saying wide-body, it's, it's on Rolls-Royce a little more than the others in terms of percentage. Okay?
Thank you.
It's not a huge difference. Then on the summer shutdowns, I don't really know the answer to that question. What I do know is that some plants are closed at the moment, because of supply chain issues, and aren't expected to open until the end of September. But that's not really a summer shut. It's just that they've reduced capacity because they don't have the raw materials and the components to build. But I can't tell you whether the summer shuts will be longer than usual. Haven't had that information. Normally, that kind of thing happens at the last minute anyway. But right now, not getting that kind of feedback.
Thank you.
Our next question comes from Christian Hinderaker from Liberum. Your line is now open.
Yes. Good morning, gentlemen. Thank you for taking my questions. I have two. Firstly, at your bridge on slide eight, you had GBP 1 million of net pricing. Just interested in your view on how you expect to hold or perhaps improve on that in, in periods ahead given the likely phasing of, of price discussions. Then secondly, on incremental margins, clearly the 70% very solid, and perhaps driven by AGI. I know historically, you've talked about 50% being your incremental. I just wonder whether you see any shift in the balance here between the two businesses given the sort of, distribution of your restructuring efforts going forward versus that sort of 50% historic guidance. Thank you.
Okay. Well, on the pricing, we're not in many parts of our business trying to move our pricing ahead of our cost inflation. All we're trying to do is to recover our cost inflation. To the extent that we have prices very low margins on certain products, yes, we will try and move pricing up ahead of the cost inflation. But that's really just to return it to a more sensible margin. But generally, we're just trying to recover cost inflation through price increases. If, and then I think you're asking, well, how do we expect to continue to be able to achieve this? If you look back at the last 10 years or 10 years plus, half in, half out, we achieved this. Right now, actually, it's relatively not easy because no pricing discussion with a customer is easy.
But our customers are experiencing significant raw material price inflation. Clearly, in our business, we don't have raw material price inflation. Our key input costs are energy, some industrial gases, but mainly labor. And you're not seeing the same percentage increases in those labor costs that many customers are experiencing on lots of their raw materials. So I'm not suggesting that the discussion will be an easy one. But in the context of inflation that many of our customers are experiencing, what we will be looking to get is actually relatively lower than they will be experiencing from others. In terms of the 70% gearing, operational gearing, you know, we have what we did last year is we took out a load of cost. And in parts of the business, we have seen revenue recovery against those troughs.
And what we've tried to do is to hold on to those cost savings and be quite miserly about adding costs back into the business as the revenue recovers. So inevitably, to your question, we've seen that more in AGI so far than ADE because AGI's revenues have recovered, whereas AGI's have, sorry, ADE's have not recovered significantly. As ADE's revenues recover, we would expect to see a similar phenomenon in ADE. But as Stephen has already highlighted, we can't extrapolate forward that level of operational gearing beyond a certain point. We'll achieve the efficiency gains, but as soon as we start having to add pieces of kit or labor shifts, etc., then you revert to a more traditional gearing number of around about 50%. So I don't think you can extrapolate that 70% forward too far into the future.
Thank you, Dominique. Very clear.
Our next question comes from Robert Davies from Morgan Stanley. Your line is now open.
Yeah. Thank you for taking my question. My first one was just around your cost base with your employees. Just, question I had was you've been reducing the number of sites over the last few years, and sort of flexing your, sort of, I guess, variable employee headcount numbers. Is there any opportunity to actually sort of physically scale up the size of the, the, the sort of furnaces or kilns sort of doing the heat-treating process to have effectively less people running bigger individual operational sites? Is that a possibility, or is that sort of not technically feasible or not economically sensible thing to do? I just wondered, as you sort of reduce your number of sites, if there's any opportunity to sort of scale them up and reduce headcount numbers given that's your biggest cost base.
Yeah. I don't think so. For two reasons. First of all, the furnaces, yeah, there's an optimal size for furnaces, depending on the customer mix. If you put in too big a furnace, you end up running with low utilization rates, and that's too costly. If you put in too small a furnace, then you might run at very high utilizations. But actually, running a smaller furnace is more costly than running a bigger furnace that's fully utilized. And that's a competitive game. So if you're competing with somebody who's got a bigger furnace and they're fully utilized, they will be able to underprice you. Not that you get a lot of customers switching between companies. What happens is that when you go for new work, they might underprice you. But it's not a huge phenomenon.
What we do anyway is we size furnaces to be optimum for the market that exists. We're continually finding situations where we have the wrong furnace size there. So we might have a small one, and we'll swap it out and put in a larger one and move that smaller one somewhere else. It's, it's not just because of the volume of the business. It's the type of work. You know, you might get small customers doing highly repetitive work or, or very frequent work. The best solution for them is a small furnace that you can fill quickly, deliver back quickly, and then they come in with another order. Often, you're mixing a lot of different customers together in the furnaces. So, long answer, but furnace scale is, is driven by other things.
In terms of sites, you could put more equipment on a site. That has been a temptation in the past. What we find is the large sites typically get more complicated, and you end up having to have three or three PhDs to run them. You lose all kind of benefits in terms of simplicity. You get the cost of complexity comes in. There's a natural limit for that. It's easier if it's a uniform set of processes. These days, we try and keep similar processes in the same facility so that it doesn't become highly complex. If we can do that, then certainly, the bigger, the better. That's one of the things that you're seeing potentially in these emerging markets where we have big sites to start with. You're always combating the situation where distance is the enemy.
It's not about cost. It's about turn time. In other words, the customers don't want to have the cash lock up in their components because they've got all the material costs involved. So they want it back in-house as soon as they can, so they can get on and produce the goods. Otherwise, they've got an inventory lock up in the shipping times. So distance is always an issue. And that, that's a natural limitation on the scale. So bottom line, more equipment in existing sites but not larger furnaces would be the game if you've got space.
Mm-hmm. Okay. Thank you. And then my second question is just I was looking at your charts on, I think it was a quarterly revenue progression by end market. And just on the general industrial one, I know that it's a disparate mix of, sort of different, markets in there. But what can you give any color on sort of what's driven that recovery? Apologies. I missed the beginning of the call. You may have covered this already, but just that sort of jumped out when I saw it, sort of having, you know, kinda cleared the peak of 2019. Just wondered where the strength within the general industrial business particularly was coming from.
So it's certainly not coming from any particular geography in AGI. It's broad-based. In terms of which subsectors it's coming from, it's not coming from tooling. I did cover that in the presentation. Tooling's kinda gone flat. But across the other areas, you know, we've got some pickup in medical, for example. There's, which is something that we said we would be, you know, pushing anyway. But it's quite broad-based. No big highlights. There's a little bit of restocking going on but not anywhere near as much as some of our customers say they would like to do.
Okay. Thank you. Then my final one was just on the Specialist Technologies. I know that it encompasses a number of different technologies. I guess it's somewhere between sort of eight and 12 depending on sort of which ones you've been focusing on. I just wondered particularly within that group of technologies, is there one doing much better or worse than you sort of expected versus a couple of years ago? I know a couple of them have got disproportionately hit because they were sort of more aerospace-linked. You just be kind of interested in some granularity around the different parts of Specialist Technologies if possible. Thank you.
Yeah. We don't like giving too much granularity because it's competitive information, to be honest with you. I can say, you know, probably strongest area is in the stainless steel area. Low pressure carburizing, LPC. That's due to a bit of a fill-up. It's been a little quiet for the last year or so. A lot of that's got to do with where auto production was and their transition to EVs. But so, you know, LPC's been a little slower than we might have liked. But I think that's gonna come back quite strongly. And stainless steel has been doing very well. But it's always been doing very well. It's one of those businesses that, you know, it's sort of like, you know, you build the plant, and the customers turn up the next day. I mean, it's a very good business.
I'm overstating the simplicity there because it actually takes about a year and a half to get a customer persuaded to switch when they've seen the technology. The growth rates are impressive.
And, Robert, we did say on the Specialist Technologies chart, not quite sure when, when you joined, that the AGI-focused Specialist Technologies have grown 42%, whereas the ADE-focused Specialist Technologies are up by 13%. You know, both well ahead again of their background markets. But that.
I see. Okay.
Some level of granularity.
That's helpful. Other thanks, thank you very much.
Are you happy to take another question?
Sure.
Our final question comes from Harry Phillips from Peel Hunt. Your line is now open.
Good morning, everyone. Just to be very quick and brief, in terms of the M&A, I know you answered Andy's question, Stephen. But I'm imagining that, as you say, it's the HIP assets rather than the family assets, which are probably recovering really well in this environment. And as you say, there's not much sort of corn in the ground, in, in that HIP context. The other one was just around CapEx and growth CapEx. If you highlighted it, Dominique, I missed it. But could you just give us some thoughts on where those might be in the current year and where that growth CapEx particularly goes in 2022 and beyond?
Yeah. I'll do the M&A one just a bit a little bit more color there. It is PE-based. I wouldn't jump to the conclusion that the family-owned guys are doing great either. Some of them are in a lot of trouble. I mean, I know, you know, one or two that are really, you know, sort of near death's door. But death's door for these businesses is one of what they do is that they basically sell the assets out to liquidate the business. And somebody else is back in there straight away. So they don't disappear as a competitor. But the ones that are on the market are PE-owned for sure. There are some assets that are owned by larger companies. They're kinda holding on. There's very few of them. But they're holding on.
They're hoping that, you know, they wanna get further into the recovery, particularly if they've got any aerospace exposure. And so they're not coming up at this point. But it's a whole bunch of smaller assets that are PE-owned and not necessarily in classical heat treatment but in adjacencies with Specialist Technologies. I'll hand it over to Dominique on that.
And I'll also on expenditure CapEx, we spent GBP 10 million in the first half. And I would expect that we'll spend somewhere between GBP 20 million and GBP 30 million in the second half for the full year. So more than GBP 10 million in the second half. But it's quite difficult to predict exactly how much that's going to be because it depends on the pace of some of the projects that we've got. And, you know, as Stephen's highlighted, you know, when we're looking to add new facilities and buy new land, you know, those are binary cases. Looking a bit further forwards, the numbers should will be higher. I mean, and I'm not sure I can be more helpful than that.
I mean, if you go back, over the last few years, we've spent anywhere between GBP 30 million and GBP 50 million on expansionary CapEx. Obviously, I'd prefer to be at the top end of that range because that means we're finding lots of interesting new projects that are gonna drive our top line and profit and margin. But it really depends on the pace of finding those projects and the ability to deploy the capital there.
No, fantastic. Thanks very much, indeed.
We have no further questions, so I'll hand it back to you, Stephen.
Well, I'll just say thank you very much, everybody. Thanks for taking the time to talk to us. And hopefully, talk to you soon. Thank you.