Welcome to the Bodycote T rading Update Call. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question-and-answer session. Just to remind you, this conference call is being recorded. Today I'm pleased to present Stephen Harris, Group Chief Executive, and Dominique Yates, Chief Financial Officer. I'll now hand to Stephen to begin the presentation.
Thank you. Good morning, everybody, and welcome to the Bodycote Trading Update, Stephen Harris speaking. So as you can see from what we published on the wires this morning, a very straightforward trading update. You can say that for the four-month what we've done in the four months to October is pretty much what we saw in the first half. It's just a continuation thereof. What some say, I think people might say was a bit boring, but in the current environment, I'd take that as a compliment. The situation going forward is we can pretty much see to year-end here, and as far as we're concerned, we're going to carry on doing what we're paid to do, which is manage this business no matter what the weather, and steady as she goes, I think, is the message.
If one wants to look into next year, I would say that it's a bit hard to call that for anybody, and so we're not going to try and attempt to do that at this point in time. But from here to year-end, we don't expect to see any real surprises from what we know. In terms of digging in a little bit deeper into the numbers here, you can see that our Specialist Technologies growth rate has improved. It's not up at the double-digit area where we'd want it to be, and to be fair, I'm not sure that we're going to get there by year-end at this rate. Still improving. There's some issues when one looks at the aerospace side because you've got investment casting, capacity issues, which our Specialist Technologies service.
Those are very tight in North America, less so in Europe, and you're seeing supply chain shifts, and that kind of has short-term impacts, so we don't know where that's going in the very short term, but in the longer term, it'll straighten out. And then, of course, we've got the Automotive and General Industrial Specialist Technologies where they've been hit clearly by a number of issues, both in terms of market trends and some structural issues between North America and Europe. Nothing really to report in detail on that. If we then go down into Civil Aerospace, it's clearly 14% growth is a nice number, particularly as this is a period where the OEMs have got much stronger. Just to remind everybody, so what's driving that growth? We've got the aftermarket, which is a large part of our business, and that's effectively driven by passenger kilometers.
And on top of that, you've got the new build rate, both for all three of the major OEMs. And then on top of that, you've got the new product remediation work, particularly with Rolls-Royce. And then on top of that, again, you've got the increased content in the LEAP series. So all in all, when you stack up those pieces of the pie, you end up with these kind of growth rates, and that's obviously something that's a long-term secular growth issue and not a short-term issue one would expect. And then moving on, I would say it's such a short period, it's very difficult to draw out any real conclusions from the rest of the numbers other than the fact that it's all pointing in the same direction that we saw earlier.
With that, just the last point is year-end outlook is in line, and from there on, I think we'll take questions and answers, please.
Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name is announced, you can ask a question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. Our first question comes from the line of Andrew Douglas at Jefferies. Please go ahead, your line's open.
Morning, guys. Three quick questions from me, please, if I may. One of the things that we can get in the statement is there's an ongoing focus on cost control. Can we just talk into that a little bit more? Is this just you guys being good on temp cost control, or is it a bit more structural? I think you're seeing Western Europe. I guess that leads to my second question is with regards to the commentary about preparing yourselves for all eventualities with regards to Western European auto. I'm assuming this is you saying, "Look, we're preparing for some " preparing for the negative and looking for the positive. Again, if you can just correct me if I'm wrong there.
Third, if you could just talk maybe a little bit more about the comments you may have just made on the Specialist Tech with regards to some structural changes in Europe and America just to make sure that we're all fully aware of what exactly that means. Thank you.
Certainly. Morning, Andy.
Morning.
Let's take the cost control issues first. I mean, for us, business as usual is managing our cost base. I mean, that's what we focus a lot of time on. In the markets that we see at the moment where you've got parts of the market going down and other parts of the market going up, it becomes a more difficult task. But what we're doing is, as we have been doing, taking out temporary workers. In terms of digging deeper than that, yes, we have been taking out costs over and above the temporary worker side. Of course, labor is a big part of our cost base. And as life goes on, we do more and more of it. Is it something that we might have to react to even more strongly to? Possibly. Equally well, we might have to add people back.
One of the issues you've got is changing trade patterns really start moving these kind of things, so we have to be very, very active on it. And what we are on the ball with, right looking at it all the time, is where's it going from month to month? And so we are ready to take whichever action we need to. I think that's what we're trying to say. In terms of the structural changes between North America and Europe, I didn't mean to overemphasize that perhaps. I used too strong a word there, but it's more a case of the fact that you've got supply chain changes going on. You've got issues with how long the automotive supply chains are, people looking for new supply chains, all of which is, in some respects, it's making Mexico look stronger.
It's making Central Eastern Europe look potentially stronger, but Western Europe is weaker. I would say that's over and above the general malaise in the automotive sector. I'm not actually referring to structural changes that have to do with any specific type of vehicle, if that makes sense.
Okay. Answer. Thank you.
Thank you. Our next question comes from the line of Robert Davies at Morgan Stanley. Please go ahead. Your line is open.
Yes. Thanks for choosing that question. I had a couple. One was just I know it's always sort of slightly tricky given the number of different customers you have, but maybe just fleshing out some of the trends regionally, I think, in the general industrial would be quite helpful. And then the second was just around the energy business. That's quite interesting. You've mentioned the sort of different dynamics in subsea versus U.S. onshore, but I noticed also that the industrial gas turbine bit sort of picked up. I know it's obviously quite small, but what were customers telling you in that subsegment, briefly? Thanks.
Okay. So I'll take the energy question, and I'll hand that piece back to Dominique. Can I just clarify? When you say what are customers telling us in that segment, you mean energy in total?
Yes. Yes. Exactly. Yeah. Well, and particularly in the industrial gas turbine bit as well.
Okay. So the industrial gas turbine piece, I would say the noise is very difficult to understand. We've seen the industrial gas turbines business chunking down over the last couple of years with the primes in that field suffering quite badly and laying off. And I think one of the things that most people know is that the larger frame business in IGT, pretty much the share got lost to the Asian entrants into the market. In terms of what we're seeing now, there is some resurgence, but you get a situation where people are trying to reserve capacity, particularly in what we do, and so they're always overoptimistic in what they tell us. So we don't really listen that strongly, frankly. We of course pay attention to our customers, but we don't make huge investment decisions on those kind of things.
And the kind of numbers that we're talking about, the movements are very small given the small time period that we're referring to here. You can't really read anything in these tea leaves, I'm afraid. So that's the IGT piece. In terms of the other two pieces there, I mean, they are as it says. I think some people might have expected our energy business to be lower because there's been some declines around the piece, particularly in the Permian area, but we're seeing a balancing out of that. So overall, in many respects and this generally goes, I think, to our entire business. It's showing it in this trading statement. We have a large diversity of end markets. So anybody that wants to pin our colors to a particular market sector, you need to realize that there are lots of offsetting pieces all around the place.
That, I think, is coming through quite strongly here in this series of numbers that we're printing quarter after quarter. The wave's pretty choppy, but we're just steady as she goes. If that helps you, I'll go to Dominique for the other part.
So I think in terms of regional trends in AGI, nothing really to report significantly different from the first half. We are seeing weakness in both North America and Western Europe in our general industrial business. And the areas of weakness that we're seeing, we're attributing to, because of where the areas of weakness are, to people delaying past investment decisions, which would seem to chime in with everything we're hearing in terms of how people are looking at the world. Emerging markets is a much smaller general industrial business that we have there, but that's growing nicely.
Great. Thank you.
Thank you. Our next question comes from the line of Sanjay Jha at Panmure Gordon. Please go ahead. Your line is open.
Good morning, gentlemen. Just a couple of questions on Civil Aerospace. Would be fair to say that you think the aftermarket business was stronger than you had expected sort of three or four months ago? And secondly, on LEAP, do you think the supply chain is still producing for 42 aircraft a month, 737 MAX, or is it 42 aircraft a month? And then finally, just sorry.
Oh, no. Okay. Yeah. Keep going.
Then finally, I just wanted to check. You talked about cost control. Have you changed your CAPEX plans since sort of the middle of the year?
So let me address those. I normally give CAPEX to the CFO, but it's a very easy answer. We don't make CAPEX decisions in the space of a few months, so the answer's no changes in CAPEX plans. The other two issues, in terms of aftermarket, I think one has to realize is we do follow the aftermarket but don't think of us as a company that sells new equipment and then spares to the aftermarket. What we do is work on components that can either go into new build or the aftermarket. And quite frankly, we don't know exactly where a particular turbine blade is going, for example. It might be going into a new engine. It might be going into the aftermarket. The only piece that you can absolutely put your finger on are engines which are no longer in production, so legacy stuff, which we also do.
But you can't take trends on aftermarket out of sort of much older engines because we're across all the platforms. So there is no read for us that we're capable of actually calling the aftermarket. We just know it is a big portion because that's what our customers tell us, and we see their sales, but we can't analyze to the detail. And similarly, again, Sanjay, I'm sorry to disappoint you, but in terms of aircraft build rates, we can't be that analytical. Our business goes all the way on the West Coast of the United States where we do the raw forgings and castings at the very early stages of airframe build right the way through to the final assembly stuff.
So the actual build rate and its change on a month-by-month or year-by-year rate, it's a much longer wavelength for us, which is why when 737 MAX, everybody was sort of getting excited about for us, that's a ripple because we're right the way through the build program, which, in fact, for any engine, it's a couple of years, and then you've got all the aftermarket. So I'm sorry to tell you, you can't actually extract that level of data out of our business because it really is a broad-fronted business.
Okay. So you have no visibility on what's going to be in the 2020, whether it's the aftermarket or whether it's the engine?
I wouldn't use words like visibility, Sanjay, because that's pointing people in the wrong direction. We can see the trend data. We get assurance from all of our customers about their business. We know where these trends are going, and they don't change shortly. That's the beauty of it. They don't change. We don't need to analyze down to, is it one or two engines extra or less? Because actually, that's a small part of it. It's not a visibility issue. This is about the fact we have a lot of visibility here, and it's long-term, and it doesn't change fast.
Okay. Thank you.
Thank you. Our next question comes from the line of Mark Fielding at RBC. Please go ahead. Your line is open.
Yeah. Hi, guys. A couple of questions as well. Thanks. First one, just can I join the dots on ADE where we talk about being up 3% at constant currency, but with aero +14 and the energy-related stuff relatively close to flat, is there another part there I'm thinking maybe it's defense or is it soft or is there something else? And I think you want to answer that, and then we'll come to the next question.
Well, I think there's, as we said at the half-year, that a chunk of our general industrial business, and this is particularly the case in North America, actually rests within the ADE division. So it's not an entire match-up, a complete match-up between the ADE division and the Aerospace, Defence & Energy market sectors. So that there's.
Sorry.
Well, the second element that we also talked about at the half-year was an element of discontinued business within the ADE sector where we divested ourselves of a business back end of last year.
Great. Thanks. Then certainly, just in terms of the half-year, one of the factors, obviously, and why you expect the specialist to be better through the second half was with the capacity coming online. Maybe just an update in terms of where you are in capacity utilization across Specialist Technologies and how we think about that moving into 2020 if there are areas that still are relatively constrained, whether you've got more general capacity for growth in that business now?
Yeah. Great question. So the capacity coming online that we were referring to was primarily in HIP services, and indeed, that is online. That capacity is related primarily to the aerospace casting industry. And as I mentioned earlier, there's a little bit of flux going on in that because the capacity available in the supply chain, not our capacity, is absolutely tight as a drum in North America. And you've got work moving to and fro at the moment as people are resourcing there. So the capacity's there. Is it being filled at this point in time? No. So it's a little bit slower than we thought it would be in HIP services. In terms of the rest of the technologies, certainly, S3P has, for the first time since I can remember, quite a bit of available capacity because it does have exposure.
As everybody, I think, who follows us knows, into Automotive & General Industrial clearly, those markets and the background in those markets are a bit weaker. So we've got capacity there, but we are still putting more on because we'll build capacity for a three-month period. We build it for a much longer period of time. The longer-term trends and indeed the medium-term trends there are good. In the other areas, the only area where you could say we might have a little bit of a pinch is in Low Pressure Carburising, which, excuse the pun, continues to moat the wrong. But yeah, that's about the only issue. I think we're in pretty good health, actually, in terms of our capability to deliver.
Thank you. Can I just ask one other question in terms of just the world of M&A and how you're seeing the pipeline there? And obviously, you look at bigger things and smaller things and whether this environment's throwing anything up, particularly probably in the smaller side of things.
I don't like the phrase throwing things up because that sounds like an arty thing. But yeah, are there more assets on the market? Absolutely. Are we busy? Absolutely. Anything more that we can tell you? No.
Great. Thank you.
Thank you. Our next question comes from the line of Maggie Schooley at Stifel. Please go ahead. Your line is open.
Thank you. And one gentleman. As a follow-on to Mark Fielding's question, on the flip side, I think there were a few facilities that might have been problematic or lower performing. Has the current environment presented an opportunity for quicker restructuring on several of those plants?
Good question. Yes, and it's ongoing.
Okay. And then the second question I had, just as a follow-up, very quickly. In the second half of 2018, you put some price increases through to combat some cost inflation. In the first half of 2019, you said you didn't put any further price increases through. Is there anything else, as you went through, albeit a short period, in terms of upward pressure on pricing or increased utility prices or anything on the price specs we should be thinking about as you go through the rest of the year and into 2020?
Yeah. I would say, Maggie, don't be too analytical on timing of price increases because when you put a price increase through, you've then got to take account of when that pricing actually takes effect. So when we talk to customers and say we agree with them that we're going to have a pricing increase, it doesn't mean it happens day one. It phases in over a period of time. Because what you try and not do is shock the whole world with a price increase. So it's a progressive issue. So to say that there was no new initiative in the first half, it's true, but you still have stuff coming on from 2018 that was coming into effect in the first half. So it's not a clean break, if I can say that.
In terms of upward pricing pressure, I mean, for sure, there is still upward cost pressure. Our track record, we stand by. We always cover it. I don't see us changing that going forward.
Okay. Great. Thank you so much.
Thank you. Our next question comes from the line of Artem Tokarenko of Credit Suisse. Please go ahead. Your line is open.
Good morning. Thank you, guys, for taking my questions. My first one is around cost initiatives. Could you maybe give us some color about the size of the initiatives which you've taken and appreciate it if maybe not in monetary terms and maybe in terms of your headcount year-over-year development or maybe site closures and whether those have been accelerating throughout Q3?
I don't think we want to give you too much detail on that because, as you can imagine, when you're dealing with people, it's not a great idea to go telling the market what's going on in some detail at this stage of the game. It's very straightforward to work out in terms of impacts of these things because if you see the margin strengths we've got and the revenue trends, you can see where the cost actions are taking place in terms of how much it's worth. But I don't really want to talk about numbers, people, or anything like that because that tends to get out of hand.
Okay. Well, I guess, asking from day one, H1 margins were down 80 pips year-over-year. Would you expect, with the cost actions you've taken, would you expect these declines to moderate in H2?
Well, what we said in the statement is that margins and underlying cash generation remain strong. We deliberately do not give margin guidance or margin update on these updates. Otherwise, we're into effectively a full announcement. So I'm going to reserve the position there, but suffice to say margins remain strong.
Yeah. Okay. Thank you, guys. And my second question was on Specialist Technologies, I think at H1, you've commented that a couple of customer issues where customers were switching to different products and moving some businesses to China. We were holding the growth back, and the expected growth was close to double digits. I just want to check if in Q3 that's still the case. I think that was one of the issues. The growth is still close to double digits in specialists.
Yeah. I think that is fair. Those two issues, they're effectively kicked in at the turn of the year. They're still impacting the year-on-year development and will only drop out effectively at the beginning of next year.
Okay. Thank you, guys.
Thank you. Our next question comes from the line of Jonathan Hurn at Barclays. Please go ahead. Your line is open.
Good morning, guys. Just one question from me. I wonder if you could just talk a little bit about the trends you're seeing in emerging markets. I think both in the first half as +3%, you've quoted +12% for the four months. From my understanding, a lot of emerging market is automotive. So what trends are you seeing to drive that growth, please?
Yeah. So we are seeing good trends in Mexico, good trends in China. Everything that you've said there is true. I will hand over to my colleague here to explain one other part of it.
We also had. We made two small acquisitions at the back end of the first half of this year, and the contribution of one of those helps the emerging markets numbers. So the growth e xcluding.
Hello?
That acquisition. Hello? Can you hear us?
Hello.
I'm hearing both of you. I don't know if Jonathan's line has deteriorated, but both of you are audible on the conference.
Okay. I'll carry on with the answer to the question there. Excluding the benefit of that acquisition, we still showed improved performance against the first half with improved performance across a couple of our key emerging markets countries.
Thank you. Our next question comes from the line of Christian Hinderaker of Liberum. Please go ahead. Your line is open.
Yes. Good morning. Thank you for taking my question. You had a sharp drop in AGI margins in the first half, which you ascribed to the seasonal weakness at the end of the second quarter, largely in Europe, where I think you have a less flexible space. And I guess without putting numbers on it, given that you've had continued weakness in particularly Western Europe, which perhaps has come as a bit less of a surprise, is it fair to assume that you've been better prepared on costs since and, I guess, therefore sort of better able to protect the margin in that division in the second half?
I'm pretty sure a large focus of our cost reduction initiative is exactly as you say. Is there anything else to add? No.
Thank you.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. As there are no further questions coming through at this time, I'll hand back to our speakers for the closing comments.
Yes. Thanks, everybody, for that. There were some good questions in there. I'll just go back to where we started. There's not really a huge amount of excitement in this, and that's probably a good thing. And we shall see where we get to next year. Thank you very much, everybody. Thank you.
This n ow concludes the conference. Thank you all very much for attending. You may now disconnect y our line s.