Hello and welcome to the Bodycote Trading Update Call. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today I am pleased to present Stephen Harris, Group Chief Executive, and Dominique Yates, Chief Financial Officer. I will now hand over to Stephen Harris, Group Chief Executive, to begin the meeting.
Thank you. Good morning, everybody. Stephen Harris here. Unfortunately, I've lost my singing voice, as you might be able to hear, so, I'm actually going to save it for the Q&A, and, Dominique will take you through the trading statement. And when we get to questions, if you would like to ask a question on the EU tax issue, I'm sure Dominique can wax lyrical for many hours. So, with that, I'll hand you over to Dominique.
Thank you, and good morning, everyone. So, a summary of the revenue developments in the first four months. We had strong Aerospace and Defense revenues up 15%. We already saw good growth coming through in the second half of last year, and that's continued into this year, so good solid performance there. Automotive overall was down 4%. Volumes are down. We were up against some particularly strong comparatives from 2018, and particularly so in Western Europe, where, as you might recall, we saw some volume pull forward into the first half of last year ahead of the introduction of the WLTP regulations. So we were up against some strong comps there. General Industrial revenues were down 6%. In part, that's down to discontinued businesses, which were responsible for just over a percentage point of that decrease.
but in addition to that, and looking at which subsegments of the General Industrial business more generally that we saw the declines in revenue year-on-year, we believe that this is a reflection of people delaying investment decisions in light of some of the macroeconomic uncertainty around there, whether it's to do with potential trade wars, trade barriers coming in, or indeed uncertainty around Brexit in Europe more generally. Emerging market revenues grew 6% in the first four months, so that represents solid growth, as most of you will know. Our emerging market business is an Auto and General Industrial market, so relative to the background performance of those market sectors, that represents good solid growth. Similarly, Specialist Technologies revenues grew 3% in the first four months. Again, we saw very strong growth last year. We reported on this with our full-year results.
Very strong growth in Specialist Technologies supporting the auto business last year. So as we saw the softer automotive revenues in the first half of this year, undoubtedly that's had an impact on our Specialist Technologies revenue growth. We believe that this will improve through the year, particularly as we come up against softer comparables for last year. Cash flow was solid. We're still investing in growth of the business, where we see the opportunities there, and we did spend some money on shares for future long-term incentive settlement. As I said already, particularly on the Auto and General Industrial parts of the business, our second-half comparables become easier. You may recall the chart that we showed with the full-year results on the growth first half, second half in those market sectors. So, the comps get easier in the second half.
So even on the basis of our current business trajectory, the business that we see today, not on the basis of any pickup in business, we're still confident that we will meet the full-year outlook expectations. With that, I'll hand over to everyone for Q&A.
Thank you, ladies and gentlemen. If you wish to ask a question, please press zero one on your telephone keypad, and if you wish to withdraw your question, you may do so by pressing zero two to cancel. There's going to be a brief pause while questions are being registered. Our first question comes from the line of Andrew Wilson from JP Morgan. Please go ahead. Your line is now open.
Hi. Good morning, guys. I just had a couple of questions around the end market development. When you talk about the General Industrial, sort of, I guess, change you've seen, you're appreciating that the comps are very difficult. Can you talk about that a little bit in terms of if there's been particular variation across regions and just how that compares to your expectations heading into the year?
Well, as I said, on the call, the General Industrial was better in emerging markets than it was in the more developed markets, albeit it is also true to say that the majority of the emerging markets business is auto business. Across the other parts of the business, we saw similar numbers in North America and Western Europe in terms of drops in the General Industrial revenues.
Let me put a big color on that for you, Andy. So one of the main areas where you see capital investment in GI is in major tooling. The people that went to the capital markets there, you saw our segmental split on general industrial. And the major tooling is a CapEx-driven business, so it's getting ready for production or getting new product introductions done. And major tooling I mean, this is big stuff. This is not drills or anything. And what we're seeing there is a change in flows. One of the things is that the tooling, be it for emerging markets or developed markets, all tends to be in the Western markets. And so from our perspective, we register it as Western markets, but we're seeing a hesitation in that major tooling.
That's one of the things that it doesn't give you much color on the overall because it's most of the tooling is coming out of Western markets anyway, if that makes sense to you.
Yeah. That's very helpful, actually, in terms of understanding that. Just the second one, just on automotive, and I appreciate this might be impossible, but are you sort of—I guess I'm interested in customer indications, and you know, recognizing that they are only that. If you've seen any sort of change over, I guess, the last couple of months in terms of customer indications, in terms of plans for the second half?
Not that short-term, no. So when we get customer indications, the ones we pay attention to are the Primes. We don't pay that much attention to the Tier ones, Tier twos, because they're taking their marching orders further upstream. And the amount of information we get from the Primes is always longer-term. We don't get told stuff about, you know, short-term, near-term stuff. And so can't help you much there, I'm afraid.
No, no. That's, that's helpful. And then if I can just squeeze a third one in on just on the U.S. onshore oil and gas space and just interested, obviously, the destocking I don't think is any surprise. But again, just kind of how you sort of see that market developing through the balance of the year, please?
Okay. So I think one of the things that, it's worth making clear is that the destocking has been constrained to a very small set of customers. So it's not right across, but in fact, it's been quite severe at a couple of the big names that we service. The background there of that business appears to be fairly good. And as you know, Andy, you know, when you get destocking, when the destocking stops, they don't have to restock. They just have to stop destocking, and then our sales go back up because we're supplying into inventory. So, given that the background market that our customers are servicing seems to be fairly robust at the moment, irrespective of all the noise you read in the newspapers, the background business seems to be clicking along okay.
When we get to the end of this destocking event, one might expect that to click up. Having said that, I will say that we aren't relying on any of that when we talk about our full-year numbers.
That's great. Thanks very much, guys.
Thank you. Our next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead. Your line is now open.
Good morning. Thanks so much for taking my questions. I'll start with just a follow-up to the questions online as to how the period's progressed. And just to come back to General Industrial, do you get any sense, as we went through the year, especially kind of coming out of January, February, and into March, April, kind of more real months and maybe even looking at first two, three weeks of May, is there any sense of change of sentiment from your customers? Appreciate it's very difficult to compare months, but more of a maybe color rather than a numerical answer.
Yeah. Well, color answers, I guess that's down to me, Andre. I can't really help you. One of the problems you get is I could give you all kinds of anecdotal issues. There's so much noise month by month, it would be misleading. So I don't think it's worth us trying to do that. You have to look at the period in total, I'm afraid.
Okay. And on Specialist Technologies, just the growth slowing down in January-April, and clearly Automotive, as you said, impacted. But for full-year 2019, are your expectations to hit that double-digit watermark that you have for that part of the business?
I think it's a very good chance, I would say, that we're not 100% certain, given all the uncertainty that's out there. I mean, it's, in my experience, the level of uncertainty out there is higher than I've seen for a long time, not in our business but in general. But there's every indication that we should be there. I mean, that our certainly our Aerospace and Energy businesses are really doing quite well. So we should, and I'm not. I'm talking specialist technologies there. I think that should really come to the fore.
Got it. Thank you. And, on cash, just a clarification, really, on, so down or outflow of GBP 5 million, in, in this period versus inflow of GBP 5 million in comparable one last year. Could you give us an idea of how much was, you said there was share purchasing for future LTIPs, so it's not, I guess for the current ones, so you're just buying shares in Treasury. Is it is my understanding of that? Just wanted to check how much of it is that. And then how much is CapEx increase?
Okay. Order of magnitude, that was GBP 5 million on the share purchases. And we're at this stage; we're not disclosing CapEx numbers nor the working capital movements, but suffice to say that underlying, there's nothing extraordinary happening with working capital.
Okay. And you obviously made very clear statements on the intention to grow through CapEx.
Yep.
Thank you very much.
Thank you. Our next question comes from the line of Andrew Douglas from Jefferies. Please go ahead. Your line is now open.
Morning, gents. Andre has asked my question on specialist tech, so good to see that's going to come back in a second half better. Can you just two points of clarification? On the discontinued impact within the General Industrial, can you just give us a number for what that is? I appreciate it's not kind of material, but it would just be helpful to understand. And on the EU State Aid case, am I right in thinking that you've been pretty cautious in your tax guidance going forward? So if we were to take a worst-case scenario, that's already baked into your tax guidance, going forward. And then one for Stephen, just a quick very chit-chat on the backdrop for M&A, if you can. That'd be great.
Okay. On the discontinued business, and I haven't got the actual figure, but I'm backworking it from the percentages, the answer is just over GBP 1 million of impact on the General Industrial revenues. On the EU State Aid question, this was already out there as we've noted in the update that there was a question mark. So we had already planned around the fact that this eventuality might happen and that this benefit might not be there going forward. So our 24.5% tax rate guidance is based on that. So there is no change as a result of anything that's happened this year to that tax rate guidance.
Okay. That's helpful. Thank you.
Yeah. M&A, Andy, so two comments there. I mean, the bolt-on strategy progresses, you know, to pace. There are a number of opportunities out there that we are working on. It's the same as always. Whether we close them or not will very much depend on the vendors. And those, you will recall, are privately owned pretty much by family managers. That's the way that business works. And one thing or another, they are almost always unaffected by what's really happening in the world. It's their own perception of their own business. There is an interesting dynamic going on elsewhere, though, and that's particularly in some of the larger areas where we've been pursuing a number of larger acquisitions akin in the Specialist Technologies.
Some of these are private equity-owned, and it's fairly clear that the PE guys are, I won't say rushing to market, but certainly pushing to market at quite a rate at the moment. So I'm, I'm not sure that that's confined to the things that we're interested in. I'm just seeing it, as well right across the piece. So there's, there's something afoot in the PE world, which I'm, not really sure what's happening, but they're certainly pushing their, their wares to market at the moment, which always makes me a bit nervous when people are rushing to sell.
Yeah. Okay. Great. Thank you, guys.
Thank you. And our next question comes from the line of Robert Davies from Morgan Stanley. Please go ahead. Your line is now open.
Good morning, guys. Thanks for taking my question. Maybe you could just flesh out a little bit more the trends you're seeing in the energy business. I know you mentioned that the business was flat with Subsea stronger and declining North American onshore. Can you just give us a little bit more color on the offshore and sort of Subsea segments specifically and what proportion that is relative to the onshore business now? Thanks.
Sure, Robert. So just to give you some proxies that you can sort of study in your own time, if you look at that, the Subsea business is very much driven by FIDs. So, you know, when these FIDs come to market, you see FIDs go up, that generally is a good leading indicator. We'll get the business on these subsea fields typically a year or so after those FIDs are signed. But, you know, and if you've been monitoring it, you'll see that the FIDs in subsea have been rising at quite a pace. So what we're seeing today is really the effect of the climb that happened in the end customer base last year, but you're still seeing prospective FIDs going up.
So that suggests that the Subsea business has actually got quite a good runway here for quite some time, just because of the lag effect it has on us. The onshore oil and gas, I think I covered already on a question. As far as the proportions are concerned, the subsea is specialist technology and the onshore isn't. And so the relative growth rates are quite different here, but I, the actual proportions, I don't know.
So the Specialist Technologies oil and gas business is about 40% of the total oil and gas business. So in as much as Specialist Technologies oil and gas is a proxy for Subsea, then that gives you the number there.
Yeah. But that's going to be a moving feast as we go forward.
Mm-hmm. And then maybe one question on A&D. Have you seen any knock-on effects from the 737 MAX issues coming down the food chain anywhere?
Yeah. Thanks for that question. The answer, I think, in reality is no.
Mm-hmm.
You know, we've actually seen something that's measured in single thousands of Euros at the moment, which shows you how minor it is. But that doesn't mean it's not forever going to be like that. Our bigger concern is not the 737 MAX. It's whether, if I can call it, the Boeing contagion spreads further within that company. If it does, then there's far more at risk. Right now, it's a small issue, but people's uncertainty in this area could well make it a bigger issue. And I think, and here, I'm talking above my pay grade. What you might start seeing, of course, is a swing of orders towards Airbus, and that, in turn, affects the engine platforms. The problem with that will be it's not a decline in the total revenues.
It will be a phasing impact because, you know, one side will be slowing faster than the other side's picking up. But that's all speculation, Robert. The current impact of MAX is not great. It's a question of whether it actually takes a life of its own on a wider basis. Hope that helps.
Yes. That's great. And maybe, maybe just one final one on General Industrial. You, you mentioned sort of tooling, or sort of the, the tooling platforms within General Industrial. Is there any other color you could give us on sort of the moving parts, either regionally or, or end market-wise? I know you sort of obviously cover a lot of different customers in different regions, but, any, any sort of further color on the General Industrial trends would be super helpful. Maybe the sort of, yeah, maybe some of the exit rates that you're seeing at the moment.
I don't think it's a good idea because it's a short period of the year so far. As soon as you start getting down into too many details, you get lots of noise. So you stand a good chance of drawing the wrong conclusions. I mean, we fight that all the time internally. So while one can look across the subsegments in a bit more detail, you have to get more data in there, so much further through the year. At this stage, the only thing that we can comment on really is the big stuff, and that is the major tooling. So I don't think it's worth looking at the noise and the others at this point in time.
Okay. Yep. Fair enough. Thanks a lot.
Thank you. Our next question comes from the line of Jonathan Hurn from Barclays. Please go ahead. Your line is now open.
Good morning, guys. Just a few questions for me. Firstly, can I just come back to automotive and essentially the outlook for the balance of the half? I think if we look at May and June, there's some really tough comps for you in automotive. So can we expect the run rate there to decrease from the -4 that we've seen for the rest of H1?
I'm just looking back at last year's numbers. I undoubtedly, you know, the first two quarters last year were the strongest quarters. Quarter two was very slightly stronger than quarter one. So if the answer to your question is all other things being equal, albeit it's a two-month period, and as Stephen's already said, there's a big danger in drawing too many conclusions, trying to read too much into portions of our business over a very short period of time. But I think it's fair to say that we wouldn't see anything dramatically different in May and June from what we've seen year to date. As you will have known, though or as you will know, though, from our November trading update last year and then the full-year results, the auto numbers weakened through the second half.
We should start to see improved year-on-year comps, even based on today's trajectory, as we go into the second half.
Okay. Very clear. Thank you. Second question was just on that sort of flat performance or gapy. Within that, there must have been or there should have been some positive pricing, right? You're still seeing a positive pricing environment in the first four months. So could you just give us a feel for essentially the price or the split between sort of volume and price, if you could? Thanks.
The split between volume and price. What we can say is that we're covering our cost inflation pretty much. As far as the absolute split, I'm not sure.
Yeah. I'm not sure we disclose that, because otherwise, we risk at people getting people coming back and asking us, why their price increase wasn't exactly in line with the.
Exactly. Yeah.
Average.
But I don't think we should go there, Jonathan.
Okay. No. Fair enough. Fair enough. Just the final question is just obviously your emerging market demand, and obviously, China's been pretty, pretty strong for you. I mean, can you kind of spit out, if you can, sort of the demand, or your customers within that area, how much it essentially goes to sort of local customers and how much of it goes to sort of multinationals, which then may export out of China? I wonder if you could just give us a split. It'd be helpful.
Okay. So, the answer, I think, is an interesting one here. The amount that goes to local customers is very, very small, and the amount that goes to international customers that export is very, very small. So it's not, people you know, we, we've embarked on a strategy in China in particular of not supplying people that went there because it's a low-cost country because, in fact, when they buy from us, it isn't low-cost in China. Prices in China, for our work is actually the same or higher than it is in the developed countries. That's a lot to do with energy pricing and the like. The issue is our customer base there is international customers or foreign customers, non-Chinese customers that are selling into the Chinese market. So an example is people that want to sell to SINOTRUK.
SINOTRUK's quality of steering gear and transmission gear is not good. So they actually ask the Germans to give them their technology, and the Germans set up in China to supply to them. And we supply the Germans as a general kind of if you want to do it by national status, as it were. So our customers are Western companies that are supplying into the Chinese supply chains.
Okay. Very clear. Thank you.
Thank you. Ladies and gentlemen, just to remind you that if you wish to ask a question, please press one on your telephone keypad. There'll be a further pause while questions are being registered. It looks like there are no more questions registered at this time, so I'll hand the call back to you, speakers, for your closing comments.
Thank you very much, everybody. If anyone obviously would like any more questions answered, please feel free to call Dominique Yates directly. Thank you very much.
Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.
Thanks.