Good morning, ladies and gentlemen, and welcome to the Full-Year Results Presentation. I'm Stephen Harris, the Group Chief Executive, and with me here today is Dominique Yates, our Chief Financial Officer. I think it's fair to say that, as we got up this morning, there's no doubt that we live in highly unusual times. What we're going to do, in our presentation today is that we're gonna focus on 2019, and the results that are contained there, and the actions that we've been taking to achieve those results. We're then gonna take a look forward, in through, the immediate unpredictable set of stuff that we've got in front of us to more of a medium-term outlook. At the end of it then, of course, we'll take questions and answers.
So if I just move to the agenda itself, I'll give you some highlights here, and a quick intro into the business review, hand over to Dominique, and then come back, and finish off the business review, and summarize 2019. And then we'll do this look forward, into what we see into the future through this near-term uncertainty. With that, let's go to the highlights themselves. So I think it's fair to say we've had a successful year in terms of execution, in the business, a resilient margin of 18.7%. I think everybody should agree that that's a pretty good result given the tough market conditions that we're out there. Good operational performance, strong control of costs. At the end of the day, that's what this company is known for and what our people do very well.
We've had a successful execution of our acquisition strategy and, of course, the Ellison acquisition that we announced at the end of the year, which we expect to close, complete on at the end of this quarter. Also, important to note, we have a very strong balance sheet, and Dominique will go into more detail on that. Even after the acquisition, one might say, we have a very strong balance sheet. Results in total, revenue down 2% in constant currencies, but headline operating profit down 5%, and our return on capital invested standing at 17.7%. Free cash flow, we have a free cash flow conversion of 91%, sorry. And finally, we're going to be recommending a final ordinary dividend of GBX 14 , which brings the total for the year to GBX 20 . That's an increase of 5.3%.
Now let's just move to something that's quite topical at the moment, which is our ESG highlights. And just a quick note on these. There's a lot of this in our annual report for people that want to go into it much more in much more detail. But suffice it to say that ESG is something that's been embedded in the Bodycote culture for many years. The fact that there's more reporting requirements today is good. It's something, though, that we have been on for a long time. Here are some of our achievements that we're proud of. The one I think I would pick out to put into context is our environmental impact. So our carbon footprint has been decreasing since 2015 quite substantially.
If you want to look at Bodycote, which we, we work in the thermal processing industry, and another way of looking at that is we're actually managers of energy. That's what we do day in, day out, is we manage energy, and we're very good at it. And when we do it as opposed to our customers, we're a lot more efficient than them, and our own efficiency is growing, increasing all the time. So, Bodycote is in a very strong position to beneficially impact the environment. The other highlights are on there as well. There are a lot of people-related issues, but I don't want to go into them in detail here. Please look in the annual report. And I'll finish up on this slide just pointing out something.
So I think everybody's pretty familiar that our board of directors is quite diverse, both in countries, international representation, and the fact we got 43% women on the board. What people may be less familiar with is that our executive management team actually represents six countries, and we have 36% females on the board. With that, let's move on into the detail of the actual presentation here. So number one, upfront is, our driving of performance. We've been doing this, very strongly. It's what we do day in, day out. Ours is a business that we manage on a daily basis as opposed to something that we just come back and check every few months. So we're, we're on this business every day.
We manage the costs quite closely, and it's a local issue in terms of what costs move up or down, and our systems and processes drive that. Overall, we reduced headcount by 6% during 2019, to a year-end number which is just over 5,300. And within that, a further two-point reduction in the temporary headcount. So we have now carrying 8% temporaries. In normal times, we would have 15%. There is some more room to go on the headcount, but that number will, of course, never get down to absolute zero because we do have parts of the business that are growing, and indeed, we have daily fluctuations. So we always have to have a minimum few points of temporary and contract labor anyway. Bottom line, resilient margin, 18.7% driven by what we do.
Just looking to our strategic investment priorities, this is something that I will come back to after Dominique's gone through some of the numbers here, but putting them up there in black and white. Number one, secular growth markets. Investing in Civil Aerospace, for example. There are some other growth markets that we invest in, such as medical, but they're much, much smaller. And Civil Aerospace has been a focus, and we will come back to the details on that. Of Specialist Technologies, which we have as a high priority, and then Emerging Markets. And last but not least, we do try and do network infills either through greenfield or acquisitions for our Classical Heat Treatment business to actually strengthen our position in local markets. And our businesses, of course, are local businesses. With that, I'll hand over to Dominique.
Thank you, Stephen, and good morning, ladies and gentlemen. Chart nine summarizes the group's financial results. As Stephen has already highlighted, 2019 has seen some challenges, particularly in the automotive market in Western Europe. Overall, with the help from the strong Civil Aerospace, revenue growth, though, revenues were down a couple of percentage points. But again, as has already been highlighted, group margins were very resilient at 18.7%. Cash flow was strong, and I'll come back and talk about that a bit later. Headline earnings per share was down 7%. And in line with our progressive dividend policy, the final dividend increases 5.3% to GBP 0.14, bringing the total ordinary dividend for the year up to GBP 0.20, up from GBP 0.19 last year.
Following the announcement of the Ellison transaction and in line with our policy, we aren't proposing a special dividend this year as we have a clear and immediate use for our spare net cash. Chart 10 shows the operating profit bridge. Two points really to bring out on this slide. Firstly, variable pay in the form of the charge for bonuses and long-term incentive awards is lower, reflecting the impact of the challenging year that we faced on our variable remuneration. Secondly, and more generally, and again, as Stephen has already alluded to, we have taken action to reduce our cost base already to align the costs in line with the demand. Accordingly, while it's not shown here on the charts, central costs are lower than they were last year, and you'll see this in the segmental analysis in the press release. Chart 11 shows the division's performances.
ADE margins benefited from the revenue growth in Civil Aerospace and the positive gearing impact that that has on the margins. In AGI, we've experienced a margin decline, largely down to our Western European AGI business, which constitutes 60% of the total AGI business and where we saw significant declines in the automotive revenues in particular. As you'll know, our largest cost is labor, and beyond our ability to adjust our temporary and contract labor in some of these markets, it takes time to make more radical adjustments to the workforce. Stephen will talk more about this in his section later. Chart 12 presents the group's results by major currency. When we compare with last year, you will note that Euroland's proportion of the group's profit has reduced, while that of the U.S. dollar denominated business has increased.
In part, this is down to currency movements and the relative strength of the US dollar, but it's mainly due to the lower margins in the Western European AGI business that I described on the previous slide. Onto chart 13. We gave guidance for 2019 that our tax rate would be 24.5% or around that mark, and our headline tax rate has actually come in slightly better than that at 23.8%. Looking forward to 2020, then assuming completion of Ellison in the coming weeks, we are guiding to a headline tax rate of 22.5%, reflecting the tax rate benefits resulting from that acquisition. We have a very healthy balance sheet. At the end of last year, we had over GBP 20 million of net cash on the balance sheet.
Even looking at the balance sheet, though, on a pro forma basis, taking into account the Ellison transaction, we have a gearing, net debt to EBITDA ratio of around about 0.6 times. So even post-Ellison, our balance sheet is very, very strong. We also have more than two run years to run on our existing GBP 230 million revolving credit facility. Chart 14 shows the group's development of free cash flow. As we've already mentioned a couple of times, another very strong year for cash flow conversion. Free cash flow conversion there, 91%, GBP 123 million of free cash generators. And it's worth, you know, just reiterating, that is after we've paid all of our taxes and after we've spent GBP 50 million maintaining our capital equipment, as well. So very strong cash generation from the business.
Chart 16 is the usual slide we have, sorry, chart 15, reiterates the capital allocation priorities for the free cash that the group generates. Chart 16 then shows how we have used that free cash that I was talking about over the last five years. So in that time frame, we've generated over GBP 500 million of free cash. We've invested almost GBP 400 million back into the business to support future profitable growth. We've returned over GBP 300 million in the same time frame to shareholders.
Finally, from me on chart 17, this shows the revenue development of our recent facilities, defined as those opened in the last five years. We spent GBP 48 million of capital on these facilities, and as explained before, we would therefore expect eventual revenue from these facilities of more than GBP 50 million. You'll see that we're making progress towards that figure. Now, I'll hand you back to Stephen to continue the review of the business.
Thank you, Dominique. Okay, if we move to slide 19, these are the strategic investment priorities that we have that I said we were going to go into more detail about. So if we turn to slide 20, the first one up on the list is Aerospace and Defense. So, 2019 performance in Aerospace and Defense, this now represents 27% of our group revenues. And we saw growth of 14% in total. 17% of that is Civil Aerospace. The balance is the defense growth, which is primarily flying assets, and that had a growth of 6.5%. So, where does the growth come from? So clearly, we have growth in this business that follows the passenger kilometers that have flown and the size of the fleet.
So as the fleet grows and as people fly, then we see more replacement parts, and that is a large portion of our revenues in Aerospace and Defense. We've got above-market growth from the momentum that we've got coming from the wins that we've had. Actually, over the last decade, we've been working on this segment for about 10 years. And we've got good wins, contract wins on LEAP, both LEAP-1 A and LEAP- 1B, and also on other platforms. So quite a number of platforms that we're in. And our business is primarily engines and landing gear. I'd like to point that out too. An interesting point too is that we've recently been getting quite good market share gains. And that's not about getting onto more print, as it were, not onto more platforms.
That's about the fact that the OEMs have been rationalizing the supply chains over the last year or so, because they'd overbuilt them for the ramp-up that they were going for. And as they've shaken them down, we've actually been very active making sure that we're on the right side of the fence in terms of who the winners and who the losers were. And that's also given us some market share gains. Just a nod to the 737 issue here quickly. What I can tell you is, through January, as yet, we've seen no impact from the 737 halt that was announced just before Christmas. Moving on to our technologies. So slide 21. Here you can see on the pie chart the share of revenues Specialist Technologies actually occupies of the group. I've also highlighted gas nitriding.
You might recall from our Capital Markets Day that gas nitriding is one of those technologies that could almost have been designed as a Specialist Technologies. It has all the attributes, in terms of high margins in the business, and a very strong market position. The only one that was missing was growth. And as we highlighted at the Capital Markets Day, this is the process of choice for the electric vehicle business. And so we're actually expanding it because we do believe that the EV revolution will come in time. And that's something that one of these days may end up in the Specialist Technologies camp. Then if you look at on the right-hand side of the slide, you can see the growth.
I think it's fair to say that one of the things that we have learned is that when we look Specialist Technologies, we really need to look at them in relative terms compared to the background. They're not immune from the background economies. And what you can see from our Specialist Technologies business is the outperformance against the background classical heat treatment business, which is 7%. And we would expect to see that outperformance ongoing, and indeed, in the better times, the good times, increasing. So we've always talked about high single digits, and indeed over 10% in times. And that we should look at in terms of a relative issue as opposed to an absolute issue. Specialist Technologies, we've got strong growth in HIP services and Surface Technology. And don't forget, Surface Technology is actually also the business that we are acquiring with Ellison.
If we then look to slide 22, moving to the Emerging Markets. So the Emerging Markets is 9% of total group revenues. Just to note that about 2% of that is in China. And Emerging Markets has a high exposure to the car and light truck market, something which I'll come back to a little bit later in the presentation. We've seen 5% growth here. And notably, in the second half in China, we saw 15% growth. The strongest prospects for electric vehicles is actually in Emerging Markets. We're seeing that day in, day out, the requests for proposals that we receive come from the Emerging Markets and not so much in the Western markets. This is primarily, though, a European comment. It's not a North American comment. The North, the European, drive on supply chains has been moving to Eastern Europe.
and then, of course, you've got the indigenous electric vehicle issue in China itself. So we're investing in these markets, and we continue to invest. So if we just look at the GBP 61 million we've invested in 2019 in our strategic priorities, we've got capacity enhancements, and they're up there on the slide. Hot Isostatic Pressing is going apace. We've also been investing in extra heat treatment capacity for aerospace. And this is a long-term market. It's not something that one should look at. In my view, it is a short-term issue. And we fully believe that in the long term, aerospace is a great place to be. From the Emerging Markets standpoint, we now have a greenfield facility open in the Czech Republic in Prague, which actually is where Dominique and I are talking to you from today, not the facility.
We're in our operations center in Prague. We're constructing a new facility in Hungary as we speak. From an acquisition standpoint, we did make an acquisition in Slovakia, which is also a gas nitriding specialist. And that's a great position both in terms of emerging market exposure and technology exposure. And a network infill in Sweden, which has got a mining exposure. And then more to come on the Ellison acquisition due at the end of the month. So just looking at the market sectors in total, you can see the Aerospace and Defense number of 14%. It was slightly higher at the end of last year. The fact that the Civil Aerospace dropped a little bit from 21%-17% is actually an impact of lapping a high number as opposed to any other movements in the trend lines. Energy, 2% down. Automotive, 8% down.
General industrial, which, of course, is the catch-all for everything else, was 4% down. That's on a like-for-like basis because we did rationalize some facilities in General Industrial in the year, and indeed, we did have a disposal. Now if we move to slide 25, and we'll go through these one at a time. Energy, note, it's 9% of our total revenue these days. Energy covers power generation such as nuclear and industrial gas turbines. It also covers oil and gas, in terms of subsea, which is a large part. And the North American onshore business, which is primarily exposed to the Permian Basin and U.S. fracking. On the first point, subsea revenues, this is a long momentum business typically. It doesn't change in the short term.
So while we've seen some highly volatile moves with the oil price, our view is that we won't see the current contracts that we're working on in subsea change much in the near term. And who knows where the long term goes, in terms of the oil price. The onshore business in North America is, as I said, it's a primarily fracking-based. And today, it represents less than 2% of group revenues. Turning to 2026 and automotive. So car and light truck is 87% of this business, which in turn, automotive is 28% of the total revenue, -8%. It's worth noting that the big weakness in automotive has been Western Europe. And what we saw in Western Europe was the automotive manufacturers' production fell once again. Just putting some numbers on that, I mean, Germany in particular is a highlight or a lowlight as one might look at it.
So in 2019, production from our customers in Germany was -8%. And that's on top of a 9% decline that happened in 2018. Registrations were actually up. So it shows you the piece that's being impacted here is primarily their export market, not necessarily their local domestic market. So we are seeing some long-term structural changes becoming evident in Western car and light truck, and that's particularly associated with the EV supply chains, which, as I've mentioned, are establishing in the Emerging Markets. Moving to general industrial. So this is 36% of total revenue. It comprises a whole host of subsegments, from medical through agriculture. This is primarily driven by the background macroeconomic demand. And there have been growth concerns and trade tensions throughout 2019. What we saw initially was a delay in capital investment decisions.
In the second half, there was some destocking going on, which we can tell in our figures without even talking to the customers. We can see it after the fact because when you see a customer change their draw-off of components from us, and they do it rapidly, you know it has to be destocking or the fact that their plants gone down. But if there are a lot of them, it's destocking. And that's something that we saw in the second half of 2019. Coming into 2020, the global trends so far have been similar with no particular subsectors or territory standing out. And in fact, we'll come a little bit more to that when we wrap up today. So in summary, 2019, I think it's fair to say that we executed very successfully in the year. Strong cost management, good margin.
We've been improving the quality of the business over the years, and we continue to do that. Lower volatility and higher returns. We are continuing to invest in our strategic priorities. We generate cash. We generate a lot of cash. Our approach to life is to invest for the future and the long term. I think we've demonstrated once again that this business is very robust. On that note, I think it's worth just talking a little bit about what drives the robustness in total from a business model standpoint. So we have, as I sit here today, 189 facilities. These are small facilities in terms of what people might generally think of as a plant. They have 30 to 35 people in them, and they are scattered right around the world.
It's very difficult to knock this company over because it's so diverse in terms of geography and customers. We have better than 40,000 customers and, as I said, quite a large array of facilities. If one facility goes down for whatever reason, the neighbors cover for it. So we have an inbuilt backup into in our system. So that's one of the reasons why the business is quite robust, particularly when there you have difficult times. So let's just go to moving, looking forward. So we expect the business to continue to benefit from the investments we've made over the last five years, nearly GBP 400 million. And those results are not yet reflected in the group results. However, we do still have macroeconomic uncertainties. And of course, in the very near term, we've got some other factors in here, which are things like the COVID-19 virus.
But overall, though the background situation is pretty much in line with what it was last year, so far. Long-term structural changes are evident in car and light trucks, particularly in Western Europe. Our belief is that the Western European car and light truck markets and supply chains are unlikely to recover to the same position as they were before in terms of size or profile. It's the combination of these issues that caused us to move into a restructuring program, which we're executing in 2020. Now is the time, I think, to take advantage of the change that's going on. We are consolidating our Western European business in particular. Our major focus of the consolidation is a pivot away from the internal combustion engine in Western Europe.
On the other side of that coin is a pivot towards the future of electric vehicles that is in the Emerging Markets. So that's something that we are undergoing at the moment. It's a program which has already started. We expect to have a charge to the P&L of GBP 30 million for this program, including cash costs of GBP 15 million with a payback of two and a half years. One of the things I think it's worth noting is that, when it comes to North America or indeed the U.K., if we move on downsizing or restructuring, it tends to be fairly inexpensive and quick. The restriction we have is to is moving customers to new facilities. But we can, in fact, react very quickly in those areas. The areas where it's harder to react in, in short order is Western Europe.
From that perspective, we do have a longer wavelength, if you like, to move on restructuring. So the fact that we're already ongoing with this, we already have had consultations in some areas and are in consultations with employees and unions and others. Plans are in front of the various labor organizations and legal organizations. So we expect this to be moving forward ahead. We may well expand it. We'll have to see. This is where we're going now. Moving then on to a quick run-through, Ellison. It should close at the end of this month, all things being equal. We're just waiting for the final clearances. This is a North American business. It's got six locations. It's 90% Aerospace and Defense. It has major barriers to entry. It's got significant customer approvals, which you cannot just pick up. They take years to get.
The rationale for this acquisition, it's a perfect strategic fit for us. It's both Civil Aerospace Specialist Technologies. it improves the overall business quality, reduces volatility, increases its robustness. It's got strong future growth prospects. And what's nice in some ways, it's actually underpinned by contractual commitments from customers. If we move on to the synergies, the major synergies we'll see with Ellison is primarily, it's revenue gains. So our existing surface technology business will actually be able to provide customer approvals that Ellison can make use of and vice versa. Overall, that should be quite strong starting from about 2021 onwards. And additionally, we'll have some cost synergies coming in of GBP 2 million annually. So just in summary, the integration plan's ready to go. That's about the interaction we've been having so far with Ellison management.
So we're already to go as soon as the whistle blows on this, and we can start. So some numbers on the slide giving you the 2019 results for Ellison. A good business. But the other thing that we've all agreed, including with the local teams in Ellison, is that we'll be transitioning the business to Bodycote norms in terms of margin over the coming years. So we do expect to see some improvements in this business as we go forward as well as just pure growth. And the consideration, of course, GBP 154 million, of which GBP 23 million is on tax benefits. So moving to Slide 35. What we've done here is overlay Ellison on a pro forma basis on 2019. And here's the impact that you would have seen if this business was part of Bodycote in 2019.
Clearly, Aerospace and Defense now becoming the standout major segment, general industrial, is larger, but that's actually a collection of lots of smaller segments. And Aerospace and Defense is the main leg that we've been moving to over the years, given its long-term nature. On the right-hand side, you can see what Ellison does to Specialist Technologies. so it's improved the share of the group in terms Specialist Technologies. and we see Ellison performing very much in the same way that, for example, the Bodycote Surface Technology business, performed in 2019 with superior growth. With that, on to Slide 36 and our outlook situation. And I think the issues in terms of outlook that I'd like to just touch on quickly is what we're seeing with COVID-19 or the novel coronavirus. And I'm not going to go into a lot of detail here.
If people have got questions, and I'll and we'll answer them as best we can. Just to note, in the Chinese situation where we have four plants, we are down near Shanghai. We have not seen any plant closures. We did see an impact from not being able to man them fully after the Chinese New Year. We're currently manned at about 80% of the business. The reason why it's not manned is if you live outside the area, there are travel bans stopping you actually getting to work. But at the moment, the 80% manning levels are sufficient to meet demand. Having said that, what we are seeing in China is a quick rebound in terms of the business. It is starting to move up quite quickly.
And that is, it's only a small part of our overall group, but that is a sort of, a positive sign, I think, looking forward. The other one to touch on is perhaps Italy that people might be, looking at. Italy, once again, actually, it represents 2.1% of group revenues. In Italy, the situation's a little different. So one of our facilities has, in fact, been closed down, and is currently being, decontaminated, I think is the term. So in a heat treat business, you can imagine that, it's probably easier than in other kind of facilities. So the business is scheduled to be closed for two weeks. And the other businesses in the area around Milan are picking up a good deal of the slack. The problem, of course, comes down to it's not our facilities that they're the issue particularly.
It's what's happened to the customer base. We're local. We serve local markets. And it all depends on which customers we're serving as to how the business goes. And in Italy, the situation is, of course, that they've shut the whole country down. So we can't actually do anything if there are no customers around. Hopefully, that will go the same way the Chinese business has gone and recover quickly, but we don't really know. And that, that is the situation as we can see it today. We're obviously taking as best care we can of our employees and our businesses. But I think we're probably in a better position than many, given the nature of our business model. With that, we can move to any questions.
As a reminder, ladies and gentlemen, to register a question on the phone lines, please press star followed by one on your telephone keypads. Please press star followed by two to retract your questions. When preparing to ask a question, please ensure that your telephone lines are unmuted locally. To register a question via the webcast, you can do so via the online questions portal. This can be located on the live page above the slides. First question on the line comes from Andrew Wilson from JP Morgan. Andrew, your line is now open.
Hi. Good morning. Hopefully, you can hear me okay. I just have a few. Yeah, perfect. I have a few questions. Just starting off on the restructuring in Western Europe, I'm just interested as to sort of what the trigger has been. I mean, that you obviously provide a lot of detail in terms of kind of transition to EV supply chain. I mean, is this, I guess, recognition also of picking the right time in the cycle perhaps to do that when volumes have been weak? And also, just interested if it's anything customer-specific or if you think this is so you've probably alluded to kind of a broader Western Europe issue.
Yeah, thanks, Andy. That's a great question, actually. Trigger implies it was a quick move. I would say it's not a quick move. It's something we've been contemplating and planning for. It's more related to a strategic shift than any specific near-term issue. It has been our growing view that the automotive business in Western Europe is in transition. Western Europe in total, you will, of course, recall because you've followed us for a long time, has been one of the weaker parts of our business in terms of our AGI business. So we've been warming up for this. The best time to do this kind of thing is actually when the background markets start to weaken. It's something we've been contemplating. We did start in-depth planning at the end of last year.
You know, and as you face into the kind of situation that we have today, it is, it's I mean, it's a good thing to actually already be on the case because a lot of the prep work is already done. Does that answer your question?
Yeah, I guess, I don't know. Is there anything customer-specific, I guess? It doesn't sound like it.
No, there's not. It's not. There's nothing customer-specific. It's market issue and long-term trends that we're doing. No specific customer issues.
Perfect. And just thinking about, and we obviously saw a little bit of this in 2019 and expecting more in 2020 in terms of the way that you're managing the cost base and you talked about the headcount. Kind of, I guess, is the right way for us to think about it and think about how to model the benefits in 2020 is we've obviously got the very specific program we've just been talking about. But assuming actions have been taken, you know, as required across the group, which obviously you've done previously, I mean, can you sort of give us any indication of the sorts of, I guess, benefit we might model from those actions? You know, notwithstanding it's obviously difficult to work out exactly what the outlook's going to be.
Yeah. So you used the magic word model. That means the chief financial officer can answer your question, Dominique.
Well, I think the first thing to say is in terms of the restructuring program itself, you know, for the reasons that Stephen's described, it takes time to put in place and roll out. Therefore, we're not anticipating a significant positive impact to our cost base from that restructuring this year. It will come through fully in 2021 onwards, though, because we are expecting to have completed it by the end of this year. I think, you know, more generally, I think you're asking how the action that we've already taken is coming through in terms of cost.
Well, you can see if you look at the second half of last year and the performance of the business and how our margins held up pretty well there, that that is already coming through and positively impacting our business result. So we are already getting the benefit from that. And there is more, you know, action that goes on every day as and when, you know, Stephen described earlier. It's every it's 180-odd facilities, making decisions every day about costs and what they need to do. And that is happening every day as it always does.
Perfect. And maybe if I can just start, it's probably a short question and maybe a difficult answer.
I think Stephen's sort of already just.
You have an advantage, Andy, that your name begins with A because you always get the first question. And so but keep carrying on.
I'll try and make this quick. You sort of a number of times, I think, you mentioned about a sort of a similar background situation in a number of the markets. And I guess just trying to make sure I understand that comment is you're talking about similar types of decline year on year, or you're talking about a similar kind of run rate? So, you know, notwithstanding, obviously, some specific COVID-19, I guess, impacts. But, you know, if we take sort of auto volumes as an example, if we take the exit rate from 2019, is that sort of how that comment's intended?
Yeah. I think in general, the general comment I would make is COVID-19 aside, the run rate coming into 2020 is pretty stable with a lot of this stuff. You know, 19 January, you wouldn't have thought that there was anything happening in the world at all. It was just a complete extension of the run rates. In fact, January held up really well. It was quite a good month. We haven't seen the impact of anything overtly negative in January at all, including, you know, what everybody was spreading about previously, which was 737. And so we did see coming into 2020 and the first month, which is the only data that we really have, you know, buttoned down at this point in time, is a continuation of prior year.
And indeed, in some areas, like North American auto, for example, are flattening out. So not even the continuation of the run rate but, or the trend, but actually, a continuation of the level where they were. Now, undoubtedly, these things, you know, are going to be, moving around a fair bit in the near term here. But the start of 2020, in our numbers, was actually quite good.
That's very clear. Thanks very much for your time, guys.
Thank you, Andy.
The next question on the line comes from Andre Kukhnin from Credit Suisse. Andre, your line is now open.
Morning, Andre.
Yes, good morning. I guess it's another name that starts with A, so we will carry on. I've got a couple of questions and a follow-up. I just want to talk about margin resilience a bit more broadly. Given what I think we're about to start seeing happening, i.e., kind of customer-driven, maybe disruption or volatility of workload for your facilities, at least in Western Europe, I just wanted to get you to talk about what are you doing to prepare for that or what you've done already.
Is there a kind of special plan, or is this the model kind of working as it has done, highly distributed? The guys on the ground know how to react to that. They don't need to kind of go up and seek your decisions on that. And just related to that, that temps, headcount number, just how low can that go? I'm not sure if you said that on the call. I was kind of getting line interruptions. So that's, kind of my first part of the question.
Okay. Sure. So I think it maybe it's good to describe what we do anyway as part of the normal course of business. So in our budgeting and planning phase that we do every year, the first thing that we do is every facility around the world has what we call a Trigger point plan where they model downside and upside situations. And they have already got in place a plan for if revenues go down 5% of facility or 10% of the facility or 15% of the facility; they have a plan in place where they know what to do. And the reason for that is we try and run this business in a very real-time basis. And there is no time to have Dominique and I or if we had the capability even of second-guessing the local management team.
So they have a plan, and we go through those when there's time to think about them. When the day comes when those plans have to be utilized, they don't have to think, and they don't have to ask, you know, sort of questions up the line. They've got their plan. They know what they're doing. They run their businesses the way they do every day. So that's normal course of business. That's how we keep on top of things so that we don't actually have this sort of central command and control, do this, do that approach to life. It's very much a decentralized decision-making process with a lot of upfront planning. That's the ordinary course. Overlay that with the restructuring plan that we've got here. Don't forget we're always restructuring every year. So that's the right term.
We're always looking at facilities and honing them up. Some that are being shut down. When we restructure businesses, by the way, what happens is that we move the equipment. The equipment's very movable. So that goes to the territories or markets, where we see future growth. So in Western Europe, we'll be moving equipment, primarily to Emerging Markets. But indeed, even within Western Europe, developed markets, you know, we'll be moving into to market segments that actually are more attractive than others than the ones that the current equipment is in. So we move the equipment. Clearly, we have to have people cost reductions there. Some people move to another facility. Some people move out of the group. Then what's left are properties, are buildings, some of which we own and we sell, some of which we lease.
So that's the nature of how that program works. This is too much information for you, I'm sure. But what happens in the current environment that we may see at the moment is that we have the ability to expand these plans. The main thing is having got on the radar with the labor offices in some respect. There are limitations. And of course, there's one of the things, you know, how do the governments react? We're already seeing in Germany, excuse me for not being able to recall the word, but short-term working being expanded quite significantly. One could take advantage of those kind of things if you wanted to. Sometimes there's a drawback because it restricts your ability to actually do restructuring.
So we're very wary about taking advantage of government support because what we'd like to do is prove the business for the future, not just get through a day-to-day issue. I mean, one of the things that we've been saying, and Dominique, I think, explained it, is it's not as if, you know, it would have to be an absolute disaster in the world for us to have a cash problem. So it's not as if, you know, there's a short-term issue in terms of liquidity or anything. So, you know, we'd rather actually move this business through to the medium-term rather than be hung up on how do we get through it for the next couple of months or so. Does that answer your question, Andre?
Yeah. See, I think that gives good flavor. I just wondered if there was anything kind of any emergency planning going on right now in Europe given that, I think, yeah, it looks like we are starting to get some more customer training.
Yeah. As I think I tried to explain. The emergency planning has already been done. It was done last year. It's what we do every year. That is emergency planning. We're not doing any more emergency planning because we already cover that stuff. So, you know, I think we're very, very well prepared. I mean, one of the things you asked was how low can the headcount go in terms of temporaries. You know, a few %, is where it could go. But, it's not going to go to zero.
Got it. Got it. Thank you. Just a couple of others. Firstly, on the cost-cutting program that you launched, what do you expect in terms of savings for, I guess, 2021?
Well, we, the cash cost of the program is around about GBP 15 million. And we're expecting a cash payback of two and a half years. So implicitly, we're expecting GBP 6 million-GBP 7 million worth of benefits from that program next year. I mean, just one sort of slight follow-up on the temps point. You know, we're not trying to get to zero with our temporary labor in any event, because we always want that flexibility. So, as the temp labor has come down, where we can, we've been looking to replenish that, as we might lose some of our permanent staff in the meantime. So our objective is not to drive the temporary and contract labor to zero.
Got it. Got it. Thank you. That's helpful.
Yeah. You've got to look at the overall headcount number.
Yes. And the final one, just looking at AGI in the second half of last year, it sounds like there was some kind of overburden there on costs maybe from the acquisitions that you closed, maybe some new facilities ramp up, potentially some capacity adjustment measures. Is there any way you could quantify that just for us not to kind of overcook the operational gearing going into 2020 given that there is already some kind of what feels like additional costs there that are not really in the run rate?
Well, so the two acquisitions that we made at the end of the first half certainly came with a cost base. So that will have added to the AGI cost base for the second half. So when you're looking at gearing, you would need to take that into account. But I think more generally, I mean, the restructuring program that we've got is focused on Western Europe and our AGI business because that's where it's more difficult to take cost out beyond the initial reduction in temporary and contract labor. So in that regard, it's not that surprising that our gearing in that business was not where we want it to be. That is why we are instituting the restructuring program and taking that cost out.
Got it. Thank you very much for your time.
Okay.
The next question on the line comes from Andrew Douglas from Jefferies. Andrew, your line is now open.
Morning, chaps. Just two questions for me. Most of mine have been answered already. With regards to the restructuring that you guys announced today but have been working on for a while, can you actually talk about how much capacity you're taking out? Or am I working on the assumption that you're taking capacity out of internal combustion engines but putting more into your EV footprint going forward just so we can figure out both top- and bottom-line impact? And then my second question is on the U.S. We've had some underperforming assets there, which you've talked about in the past. Can you just give us an update on how they're progressing and whether the restructuring plan includes those as well?
Certainly, Andrew. So the restructuring capacity issue, there the way we do it is we move equipment, which is what I was talking about before. The reduction in capacity in Western Europe will actually materialize in other places predominantly.
Okay.
The equipment will be moved to other places. It's not just in EV. This is exactly the same equipment that you use in, you know, aerospace, for example. The equipment is not specific to a market segment. It's generic. So some of those assets will be actually moving into aerospace facilities. In fact, in one situation, for example, we're actually closing an automotive facility, but we're not, we're not really closing it. What we're doing is that we're closing the aerospace facility and moving the aerospace business into the automotive facility, if that makes sense to you. So.
Yeah. Yeah. Yeah. Sure.
There's less one auto business, but it's just been completely turned into an aero business. And so it will be the migration of the assets go into the parts of the market that we think have a medium to long-term stronger nature plus the Emerging Markets, which includes EVs.
Yeah. Okay. So it's no, no overall change. Okay.
No. A little bit, a minor, but you wouldn't even be able to get as many decimal points on that one. I'll hand it over to Dominique for the-
So on the U.S. question. We've alluded, as you've indicated in the past, to two facilities in North America that are weighing on the AGI margins there. One of them, we indicated, was a structural issue that we would need to fix. And the second one is more just about developments and execution. The developments and execution is underway, but that was never going to be a short-term fix. That is a business that is making progress, but it's going to take a while.
The other one is while the restructuring program is focused on Western Europe, actually, this one, there is one in North America, and this is the one. It's moving out of our legacy facility that is more difficult and carries a lot of cost with it, and moving into a shiny new facility that we are very confident will put the business onto the right track and deliver us the margins that we should be getting out of that market.
Okay. Perfect. And just one quick follow-up on the additional HIP capacity you're putting in, in North America, you say that's operational in 2020. When should we be thinking about that contributing to, both sales and profit, please?
as soon as it's operational.
Which is what, first quarter, fourth quarter, third quarter?
Ooh. Call it half-year.
Half-year. It's okay. So half-year contribution.[audio distortion]
Okay. Thank you very much.
Good. I wonder if we could just answer a question, some more questions that have come up, on the web at this point in time. So I just want to answer some questions from Lacey Midgley at Panmure Gordon. The first thing she's asked is,
"How long do you now expect it to take to get Ellison margins in line with the Specialist Technologies business?" And that's a journey that will take two to three years, we would expect. And then, "Can we confirm the full-year revenues numbers for Specialist Technologies and classical heat treatment?"
Dominique will just come back on that in a minute.
"Are we able to give any slip between OE and aftermarket?"
That's a great question. I think the point to understand is that the margins that we make in aftermarket are identical to the margins that we make on the original OE equipment. We don't have any changes on margins because actually, the parts we're processing are replacement parts. And we don't see what a lot of manufacturers see is different pricing for different parts. We do the work. You get our price. And it doesn't matter whether it's aftermarket or OE.
Secondly, because it's the same parts, we don't actually have any visibility as to in detail as to what's aftermarket or what's OE. The only way we find that out is over time, we see what the OE build rates are, each individual one, and we know what the background trends are. So all we know is that the aftermarket is greater than 50%. We don't really like to get into any more detail than that. I think that answers your questions.
So the revenue split between classical heat treatment Specialist Technologies is gbp 541 million in the year for classical heat treatment and GBP 179 million Specialist Technologies, taking us up to the total. I think there was also a question on our revolving credit facility and what the gearing covenant is. It's 3x. So we have, as I alluded to in my presentation, very, very significant headroom above the 0.6x pro forma that we would find ourselves at post the Ellison transaction.
If we could just take Harry Phillips next, please. Get back onto the phone line.
Harry Phillips. Your line is now open.
Hi. It's Harry Phillips of Peel Hunt. Obviously, being H, I'm lower down the list. Couple of questions, please. First of all, in terms of growth CapEx for 2020, are you still planning to continue investing, say, circa GBP 30 million-GBP 40 million a year in that segment of the business? And secondly, Safran sort of gave guidance on LEAP engine deliveries of 1,400 this year. Can you just you did on the Ellison call, but can you just sort of remind us of the sort of LEAP exposure and what a complete shutdown might do to profitability over a quarter, please?
Harry, on the growth CapEx, we spent GBP 30 million last year. And I think it would be sensible to pencil in something similar for this year. It's the nature of these investments. You know, it's a bit like the facility we're building in Hungary. These are not investments that one decides to do from one day to the next. We decide to do them, and they take a while to come to full fruition. So, we would expect to spend a similar amount of money this year.
Excellent.
I'll take the LEAP exposure question. So I think it's worthwhile explaining how that works with us. We supply into the supply chains for these platforms and LEAP in particular, right from the very beginning, the raw materials, right to the end of the supply chain in terms of the finished goods that are going into the assembly. The length of time of build from those components going into an engine is something over two years, 2.5, maybe even three years in some configurations. So the front end of the supply chain is components that will be delivered into an engine in 2.5, three years' time. So there's quite a you know, a span across the supply chain in terms of timing issues.
What we're seeing is that the front end of the supply chain, there has been no slowdown at all. In fact, they are, I think, praying to whatever God they pray to that this is happening because they're eating their backlog. And they had a significant backlog that they were unable to fulfill for a while. And it was a real risk to the business in terms of the engine business. And that backlog is being caught up as we speak. The other end of the supply chain should have been hit quite quickly. But for us, actually, the final part is there's some impact there, but it's tiny. It's a rounding error.
So that's one of the reasons, and I've said this several times, where it's quite hard to see the 737 impact coming into us in terms of the, the LEAP exposure because of this long wavelength it takes to impact. Having said that, when Boeing put their hands up and said, "We are stopping production," it did cause a reaction in the supply chain. And we did get phones ringing saying, "Hey, guys. We're going to start doing some destocking." It, it hasn't come through yet. I think one of the reasons is people are, are taking advantage of this situation a little bit in order to improve their cash situation, even though they were contractually required to hold certain inventory levels. They're saying, "Hey, not, not our fault.
We're going to have to reduce a bit," so that's a long way of saying that it will take time for the business to fall to, you know, the full exposure that we've got on, for instance, LEAP. The number that I handed out last time is approximately right: if the LEAP-1A and LEAP-1B went to zero, it would hit us at about GBP 4 million a quarter.
That's revenue. Okay? But that would have to assume that the halt goes on for a significant period of time. And the build rate schedules that you mentioned, Harry, we have the Boeing schedules. We have the GE schedules. We have the Airbus schedules. Those schedules show a restart in April. But of course, word of caution, these schedules change all the time. One would never bank on those schedules, at least not in our position. We plan for all eventuality. Does that answer your question?
It does. Thank you very much, indeed.
Oh, sorry. It's $4 million, not GBP 4 million.
Right.
Okay? $4 million of.
It's with revenue, as you said.
Yes.
Thank you.
The next question on the phone lines comes from Robert Davies from Morgan Stanley. Robert, your line is now open.
Good morning. Thanks for taking my questions. One was just on the evolution of the central cost line. Perhaps you could just give us some color in terms of the stepdown there. Maybe, maybe I missed it, but I saw there was quite a notable change YoY. And then maybe, what the expectations for that line item would be for 2020. That would be helpful. Thank you.
Well, as I alluded to in the presentation on the headline operating profit bridge, you know, a chunk of the share-based payments effectively lower cost compared with previous year. And also, the bonus come through in central costs. But it's more than that. We have taken action through the year, you know, as we have across the business to reduce the cost base. And it's worth noting that the central cost line is not an absolute figure. The central cost line is a cost figure after recharge to the business. So therefore, a proportionate increase or decrease in the central costs overall results in a more significant proportionate increase or decrease in the residual central costs, if that makes sense to you.
Okay. But in terms of sort of 2020, should we be thinking of that as a sensible run rate? Because, I mean, it's sort of half of what we've seen for the last four or five years, I guess. That's the reason I asked the question.
Well, I think it all depends on what your expectation is for variable pay. Given where the markets have gone, I can't see that there's going to be a significant increase in HIP charges, based on where the outlook is today. On the other hand, some of the bonus, all other things being equal, again, depending on how the outturn is for this year, some of the bonus you might expect to come back, because that's an annual bonus.
Understood. Thank you. And then maybe just on terms of sort of customer activity and behavior and the overall sort of market trends, do you typically see or have you seen any more insourcing of activity from customers at all? Or is that sort of trend for outsourcing continuing in the same way it has been for the last few years? I guess particularly, in light of the slowdown in the markets, is that a more typical phenomenon? Or is that something you've already seen?
Funnily enough, the situation you get when there's a slowdown in the market, it depends which country you're in. Okay? So if you're in a country where they absolutely try and protect their labor force and the extreme example, I guess, would be Belgium or France, then what happens with a slowdown is that you will get insourcing taking place. We haven't actually seen that at this point in time, but that's the way the trend would go. Whereas elsewhere, what you see in a slowdown is people trying to offload costs. And so outsourcing increases. As we came into 2020, we hadn't seen a notable change in the outsourcing trends, one way or the other. You could see some activity starting now. It depends on how different companies are affected.
But if they think they've got a problem coming up, they're more likely to outsource than otherwise because it does take. I mean, one of the reasons is it's not just their, their people that swaps out. You know, we'll often buy their assets as part of the deal if the assets are in good shape. So there is a temptation for people to look long and hard at, "Should we actually take this opportunity to, to outsource at this time?" Does that answer your question?
Yes. Thank you. May and then just a final one, if I could, on general industrial. I'd be quite interested to see if there's any significant regional differences or developments as you come into the start of the year that's worth highlighting. Thank you.
At the moment, no. Ask me again in six months' time, I think.
Okay. Thank you.
The next question on the phone lines comes from Michael Tyndall from HSBC. Michael, your line is now open.
Yeah. Hi, there. It's Mike Tyndall from HSBC. Just, just one from me. I guess I'm trying to reconcile the fear in the market with what you're actually seeing in real time. You mentioned the trigger point plan. I wonder if you could share with us how many of your facilities or if any of your facilities are currently working to that trigger point plan at the moment.
Yeah. Sure. Well, China's executed on it. But in fact, the funny thing about this situation, so the COVID situation, is in some ways, the trigger point plan is sort of done for us automatically because, you know, if the government says you can't go to work, then all of a sudden, they're paying the people to be at home. And so, you know, that's what we're seeing in some areas. So one of the main elements of trigger point is, you know, who has to go home and who stays at work. But in this current environment, it's almost like the government's local government's doing it for us. That's certainly the case in Italy. So other than that, we're not seeing the deep cuts that trigger point has planned for.
Don't forget, you know, we're only a month in a month and a bit into the year. I guess it's two now. But January, absolutely not. There was no real change other than in Italy and China and indeed those places. As I said, that was forced on us rather than anything else. Could change going forward, but not yet.
Okay. Thanks.
For any further questions on the phone lines, ladies and gentlemen, please press star followed by one on your telephone keypads now. It would appear that we've got no further questions on the phone lines. Stephen, I will hand back to you for any further questions on the webcast then.
Thanks, Mark. So, the first question, this is Mark Fielding at RBC.
RBC.
RBC. I get my R's and S's mixed up here.
Can we talk more about the aerospace aftermarket outlook in 2020 given reduced flying, and how could that impact Bodycote?
Yeah. So the aftermarket replacement market, which is what we do, and we do replacement parts, they tend to be scheduled, according to flying hours. So it's not like, "I'm not flying today. Therefore, we don't have any usage." You know, you get big changeouts, for instance, of turbine blades at 5 years typically. And then at 10 years, there's another overhaul. And at 15 years, there's another overhaul. And it's those stages of the plane's overhaul that actually drives the aftermarket. So it doesn't for us because we aren't in the MRO market per se.
We're not doing repairs and overhaul, which is very much a case of when the plane lands, just do a quick repair on something. We're in the replacement market. And so it's unlikely, I would suggest, to see the replacement market move on a short-term flexing. So the fact that we've got, you know, travel restrictions going on and planes being pulled out of the air as it were and grounded, in the short term, that may, in fact, drive a bit of, a bit more demand because people will take the opportunity to do work maybe two months ahead of schedule or whatever, so they don't have to ground the plane for overhaul or replacement of parts on the real schedule. So near-term, it quite could. It could drive some uptick in that market. If it persists, how long would it have to persist for? Nine months, maybe?
A year? And I'm outright guessing because I've never seen this situation before. But seeing the way the dynamics work, you know, nine months a year, you could well see the replacement part market starting to decline. But I think our best guess at this point in time is very near-term. We don't see that happening. But it could be happening a little bit further into the future. So I hope that answers that question. The next one is from UBS. I'm afraid I can't pronounce the name. I have lots of apologies there.
What are your debt covenant constraints, if any? What limits do you have, and how is it calculated? Do you expect refinancing in the near future, Mr. Chief Financial Officer?
Yes. I think I already indicated that the debt covenant, the gearing covenant is at 3 times. And it's calculated on, you know, as you often have in revolving credit facilities, it's on frozen GAAP. So, the most important thing is it excludes the impact of IFRS 16. So our lease liabilities do not count as liabilities in that calculation. And as I indicated earlier, post-Ellison, our current gearing level is at 0.6 times. So we have plenty of spare capacity there.
That brings us to the end of the questions that are on the web. And we don't have any phone questions left. So I think we'll wrap up at this point. And I'd like to say thank you very much, everybody. This has been a new experience for Dominique and I. We've not done this live as a webcast. We normally are in person. And I do hope that we'll be in person next time we see you. With that, stay safe, and talk to you soon.