Are we all in? Just, just made it in. Okay. Well, good morning, everybody, and welcome to the Bodycote 2018 Results presentation. I'm very pleased to be here with you. My name is Stephen Harris, Group Chief Executive, and I have with me, of course, Dominique Yates, our Chief Financial Officer. We've got a slightly different agenda for you today. I'm gonna actually take you through the business review first, and then hand over to Dominique. And, in fact, when we go through the business review, you'll notice that we have some different slides and a slightly different way of looking at the group, which hopefully will allow you to, to see some things which perhaps weren't so easy to see in the past. So without further ado, let's move to the highlights.
I mean, from a highlights standpoint, pretty much every financial metric is on the positive side here. It's very good. 6.7% constant company currency revenue growth. Tiny acquisition in there, which is in the roundings, really. 13% headline operating profit growth at constant currency. You know, headline EPS up 14%. Free cash flow, very proud of that, GBP 97 million. Our return on capital employed up to 20.5%. That's actually quite symbolic for us because our hurdle rate on investments is 20%. So this is the first time we've actually breached, as a group average, the 20% mark in terms of return on capital employed.
The key points within this, though, to bring out, I think, are, first of all, our margin improvement, and I'll talk more about that. Margin improvement has been a priority for us for a decade now. We've invested GBP 44 million in expansionary capital, in expansion projects. That's on top, of course, of our stay-in-business maintenance capital. And then, within the growth statistics, specialist technologies, double-digit growth, 12%. Civil aviation, long-term growth profile for us, up 8%. And our emerging markets is up 21%. And we'll look at each of these in particular as we go through. We've got a final dividend of 13.3p, that gives us a total ordinary dividend of 19p. That's up 9% year-on-year.
We are in line with our normal cash sweeping at year-end policy that we have, having a special dividend once again this year, this time at GBP 0.20. If we look at strategic progress, and we have a number of areas of prioritization in our strategy. The first is investment in specialist technologies, then we have investment in emerging markets, and continued investment in long-term structural growth opportunities, in particular, the aerospace business. Then, of course, we've continued investing in our classical heat treatment business, which is a good business in itself.
We primarily do this through bolt-on acquisitions, to make infills in the network, and also working hard on improving our sales effectiveness, allowing us to penetrate areas that we haven't been so good at in years gone by, and that's working very well. And another issue for us, of course, is improving the quality of our business through margin enhancement and improving returns. And we can see that in the improving AGI classical heat treatment margins. Once again, I think that's eight years on the trot that we've improved those margins. And of course, we have the ongoing mix improvement from specialist technologies. So we look at those items in turn. Looking at the expansionary investments for those mathematicians in the audience, you recognize this as a Venn diagram.
Most of our heat treaters didn't know that, but it's a Venn diagram. Here are the three priority areas of investment: specialist technologies, structural growth opportunities such as aerospace, and the emerging markets. You can see that where these areas overlap, we actually have projects that service more than one area. So, we put some examples in there. The new HIP in North America, for example, is actually doing aerospace work, and it's a specialist technology, and so you can see it would fall between the two. Similarly, Low Pressure Carburizing in Mexico, specialist technology in emerging market. Then we've built a new aerospace facility in Poland, and that is long-term structural growth, along with emerging markets.
So I've said before, expansion capital is GBP 44 million, and we've invested in these areas in particular. We've got a good pipeline of investments going forward. In fact, we've got five new sites that fit within these areas of strategic investment that we'll be building up over the coming year. If we look at margin improvement, as I say, this has been a big priority for me since I joined the group, and we expanded the margin 100 basis points to 19%. And where does margin improvement come from? One of the key areas in this is in the AGI business, where margins now in AGI heat treatment are up to 18.7%, up from 17.8%.
A lot of this is based around the fact that the, in principle, the classical heat treatment business in aerospace and the classical heat treatment business in AGI should have similar margins. There's no structural reason why the two can't have the same kind of margins. In classical heat treatment, margins in aerospace, defence, and energy are just over 20%. So you can see that moving these AGI margins up is not unreasonable, and we expect to continue to do this. There's still quite a bit to go there. And then, of course, the faster growth in specialist technologies gives us a richer mix, with specialist technologies contributing about twice the growth rate of classical heat treatments and double the margin of classical heat treatment.
You can see that the increasing mix that we'll get out of this, and, of course, specialist technologies, by definition, the way we define them, means they have quite a lot of runway to go yet. I mean, these are technologies that are servicing very large potential margin markets. And then, of course, we've got our greenfield sites. The fact of the matter is, when we started our program of enhanced investment in the business, which was about, those of you that have followed us for a while, it was about 2014. I basically stood up here and said, "Things aren't looking so great going forward from a macro background, and we're gonna take things more into our own hands," and we increased our investment considerably. That's putting in greenfield sites is one of the main ways of doing that.
The problem with that approach is, in the early years, the returns that you get from the sites are much lower than the amount of expenditure that you're doing, certainly from a P&L standpoint as well as capital. And so it has a drag on your margins. And as those sites mature, and as you get a larger percentage of maturing sites than the ones that you're actually building, what happens is it starts to enhance the margins because you get rid of the drag, and that's what you see coming through here. And Dominique will take you through the greenfield sites in a bit more detail. So we look at the margin, sorry, the margin progression over the last decade. This is it here. And, yeah, we've seen tougher times in terms of the top line, but we've still kept our margin right up there.
It shows you that we've actually started to build a resilient business here. I mean, the business is much more resilient than it's ever been. It's very strong, and we expect the margin progression to continue. So let's just have a look at the business now across three different angles, from three different lenses. So we can look at it by classical heat treatment versus specialist technologies, and so you see growth on the bottom axis here, the X-axis, and revenues, absolute revenues on each piece on the Y-axis, the vertical axis. So specialist technologies growing 12%, classical heat treatment growing 5%. And then if you take a geographical slice, you can see Western Europe, North America, and emerging markets, and emerging markets, particularly kicking in at 21%. And, of course, a lot of our greenfield sites have been in emerging markets.
And then, we get to, by the actual end markets themselves, which we pay less attention to these days in terms of macro backdrop, simply because we make a lot of our growth through our own efforts. So we've got aerospace and defence at 6%, energy up 13%, automotive 7, and general industrial 6. So let's take these in turn. Let's look at specialist technologies. So now makes up GBP 175 million of group revenues, and we had constant currency growth of 12%. And the one of the great things about specialist technologies, these are very differentiated technologies. They don't just have high margins, they have very high returns on investments.
And so if we look at the capital intensity across the business, so classical heat treatment is about 1 to 1, so for GBP 1 of investment, you get GBP 1 of revenue. If you look at the specialist technologies, it's different. If we put HIP to one side, where HIP has a very intensive, capital-intensive approach to it, it's about 1.5 to 2 in HIP Services. So it costs you 1.5- 2 pounds per 1 pound of revenue in HIP Services. But in the rest of them, they are less capital intensive than the average. So most of the specialist technologies are about 0.6 capital intensity, so 0.6 revenue to 1 0.6 of capital to 1 of revenue.
With the high margins you get, you can see that the return on investments in this area is very strong. If we can see where the growth come from, you've got LPC and Corr-I-Dur over 20%. The interesting about LPC and Corr-I-Dur is they're both technologies that actually are the closest to the classical heat treatment area. They are specialist technologies. They are primarily deployed within automotive. And I think a point of note for the future is both those technologies, plus another one that we have, nitriding, where we're the largest nitrider in the world, are the technologies that are used on electric vehicles. So that's one to put in your back pocket for the future. HIP Product Fabrication grew over 30%.
Now, a lot of the HIP PF business is focused on subsea, and the subsea business has been climbing quite nicely. In fact, it's the one area of the business where we do have order books, and those order books are growing. Subsea is doing quite well. And then, of course, we have this issue of the maturing 2017 facilities in specialist technologies that we've built, and they've helped a lot in terms of the growth. There's ongoing investment in specialist technologies, and as we said, margins are quite nice in this area. Emerging markets. So for us, emerging markets are Eastern Europe, Mexico, and China. And as I said, we have 21% constant currency growth here on GBP 63 million of revenues. It's now 10% of group profits, 9% of group revenues.
It's not that long ago, by the way, that this area was 2% of group revenues, so we've been growing it quite nicely. And it's interesting to see where the growth is coming from. So in China, we actually work with Western companies to sell into the domestic market. We don't work with companies that want to go there for a low-cost base, we never have, and then re-export. We always thought that that was a dead-end game. So we've always invested alongside people that wanted to penetrate the Chinese market, and that's paying off extremely well. So our Chinese growth, very nice. Mexican growth, that actually is an interesting phenomenon. In the last two years, the Mexico to the United States has grown quite sharply, and it's quite staggering when you consider the backdrop of that.
But, actually, our business is doing extremely well in Mexico. And we've got embedded future revenue growth, because we've got 4 new facilities ramping up in the emerging markets that will continue to deliver superior growth in the coming years, and lots of opportunity for new investments. In fact, in terms of new facilities, I don't know if I said it before, we've got 5 in the cooking at the moment. Let's take another slice of the company, and let's look at it from a market sector perspective. So I'd like to use this slide, actually, to just talk a little bit about automotive. You can see from the pie chart, the share of each of the major sectors of the business, and the growth rates as well. In automotive, in total, 30% of group revenues.
But within that, we've got about 11%, maximum of 11%, that actually is exposed to the internal combustion engine. The stuff outside of that area is agnostic to whichever platform you're on. Last time I checked, cars have wheels, for example, it doesn't matter what they're driven by, steering gear. So we do a lot of work that's got nothing to do with the actual drivetrain. We did quite a lot of analysis here, a deep dive, and we found that 11% of the group at most is internal combustion engines, probably a bit less, but if there was any kind of ambiguity about the numbers, we just said, "We'll call it internal combustion engine." So that piece there, one might think, is under threat from electric vehicles.
It's quite interesting, though, when I look at it, because if that turns into hybrids, there's more work for us. And the other thing that's happening, other than the fact that our specialist technologies service battery electric vehicles very well, the other piece is, what we are seeing is a lot of requests for proposal right now for projects as usual in auto, 3 years hence. These tend to be for 5- and 10-year contracts, and there's a lot more coming at us for internal combustion engines, which is quite interesting. And I think, whilst we can't prove it, one of the things we see is people trying to turn their own in-house capacity towards the vehicles that they see for the future. And as usual, when you see a technology change, people will then outsource their legacy products.
So potentially, actually, for a decade or more here, we're looking at a pickup in industrial, in internal combustion engines, which goes a little bit against the intuition sometimes. But so that's a quick issue on—a quick discussion on electric vehicles. And so if we look at just the general market backgrounds here, you can see that civil aviation revenue is up 8%. It's our U.K. business, and that's basically driven by the Rolls-Royce supply chain there, doing very nicely. We've got a strong position on the LEAP engine, which we've talked about many times, much higher than we used to have on CFM, and the LEAP production is unblocking quite nicely. There were all kinds of problems in the supply chain, from titanium castings right the way through.
That's coming on strongly, and so in fact, in the second half, in civil aviation, we had 12% growth. So a very nice situation there, and we should see that carry on into the future quite nicely. Energy up eight, thirteen percent. That's notwithstanding the fact that the industrial gas turbine business, which was well flagged by the majors, they made some big cutbacks there, now that's off 30%. So... And we don't expect that to come back, by the way. Automotive, we've talked about, and general industrial, 6% growth across all markets. No one market standing out more than the other in terms of GI growth. And with that, I'll hand you over to Dominique.
Thank you, Stephen, and good morning, ladies and gentlemen. Chart seventeen here summarizes the group's financial results. As Stephen has already highlighted, 2018 was a good year for Bodycote. Increased revenues helped boost headline operating profit, and group margins increased to 19%, and this helped deliver a 14% increase in headline earnings per share. Headline operating cash conversion was strong at 93%, and combining with higher profits, we delivered 17% increase in free cash flow to GBP 97.4 million. The group's return on cash employed also climbed above 20%, and as Stephen alluded to earlier, this is a symbolic achievement in light of the group's 20% hurdle rate on investment. And all of this in spite of the fact that we spent GBP 44 million on expansionary CapEx in the year.
A total of 39 pence of ordinary and special dividends, also resulting in a healthy dividend yield there. Chart 18 shows the operating profit bridge. Two points really spring out on this slide. Firstly, even in the context of the more inflationary environment we experienced in 2018, once again, we have more than covered cost inflation through price increases, as the costs, high costs to our customers of switching suppliers, combined with our excellent service, give us the ability to pass on increasing costs which we incur. Secondly, again, as Stephen has already mentioned, we enjoyed a strong GBP 5.1 million incremental positive contribution to the operating result from the maturing of new facilities, here defined as those facilities that have become operational since the beginning of 2015.
Now, only two years ago, this was a negative number, and it reflects the fact that new facilities take a while to ramp up before they start contributing to profits. And we're now beginning to reap the reward of this historic investment that Stephen alluded to earlier that we've been making since 2014 in Expansionary CapEx projects. And I'll come back and look again at this later. Chart 19 shows the divisions' performances. In summary, both divisions have enjoyed good performance with similar revenue growth at constant currencies. Moreover, both divisions improved margins, with the AGI division once again gaining more as the quality of the business improves and the AGI classical heat treatment business continues to work towards its objective of matching ADE's classical heat treatment margins.
Chart 20 is designed to highlight the H1 versus H2 differences in growth that we saw in 2018. So civil aviation revenues benefited in H2 from the apparent easing of some of the supply chain issues that we've seen restraining growth over the last couple of years. The energy sector was up against some strong H2 comparables in 2017, but still showed solid growth. However, our automotive and general industrial businesses were undoubtedly weaker in the second half, even allowing for the fact that the business was up against stronger comparables for 2017. The introduction of the Worldwide Light Vehicle Emissions Harmonization testing rules certainly appears to have had an impact on auto registrations and inventory movements, with a knock on impact for our business.
On the general industrial side, growth was impacted by progressively slackening industrial production growth rates throughout the second half of last year, and industrial production growth is an important indicator for our general industrial business. Chart 21 presents the group's results by major currency. As usual, we've included the average exchange rates year to date on the chart. So as the exchange rates develop, you'll have an idea of the impact on the group's operating profit. Based on where rates are today, and they are changing a little at the moment, but where based on where they are exactly today, we would expect a GBP 2 million headwind on operating profit for the full year 2019 versus 2018's exchange rates.
And this compares with the situation back in November, when we were expecting about a GBP 2 million pound tailwind based on where the exchange rates were then. And this is almost entirely down to sterling's appreciation against the euro in that intervening period. At the interims, on to chart 22, we gave guidance that our tax rate would be no more than 24.5%. Clarifications issued by the U.S. authorities, once again, unhelpfully, just before Christmas, meant that we are confident that we still enjoyed the benefit of our U.S. financing structure in 2018, hence our ability to come in with a headline tax rate of 21.7% for 2018. However, the same clarifications indicated that we will not be able to rely on benefits from this structure for 2019 and beyond.
Accordingly, our guidance for the tax rate for 2019 and beyond, at this stage, is 24.5%, which is hopefully what most of the analysts already have in their models. I've already highlighted the group's strong cash conversion rate. Having paid out a total of GBP 88 million in ordinary and special dividends during the year, and having further invested GBP 44 million in expansionary CapEx projects, we still ended the year with a strong net cash position of GBP 36.2 million at year-end. A word on IFRS 16, which I'm sure you're all very excited about. This comes into force or has come into force from the beginning of this year.
It's the standard on leases, and essentially, it prescribes that you have to account for the benefits of the leases as right-of-use assets, while accounting for the future lease payments as financial liabilities. Now, obviously, this standard does not change anything to do with the commercials of our business, but it will result in a GBP 2 million or so increase in the headline operating profit, and approximately add GBP 80 million of debt on our balance sheet. Earnings are unchanged. For illustrative purposes, in the appendix, we've included in our normal cash flow slide, we've included the impact of IFRS 16 on the 2018 results, so that you can see what that looks like. Chart 23 shows the group's development of free cash flow, which has increased 17% from GBP 83 million in 2017 to GBP 97 million in 2018.
Worth noting again, that this is after GBP 44 million of capital expenditure on expansionary capital projects. We continue to see plenty of value-creating investment opportunities in that area, so we'll again be spending a lot of money in 2019 on expansionary CapEx projects. As promised at the half year, the working capital outflow that we saw in the first half largely unwound, leaving a small net working capital outflow of GBP 2 million for the full year. Chart 24 reiterates the capital allocation priorities for the cash flow the group generates. Investing in the business is the number one priority, followed by distributing ordinary dividends to shareholders. We're also, as you know, pursuing value-creating bolt-on acquisitions.
Finally, as Stephen already said, any cash we have at the end of the year, we'll sweep and pay out via a special dividend. Chart 25 puts this into number format for the last five years. I think it's quite a nice chart to look at. After GBP 171 million of maintenance CapEx spent on the business, we generated very nearly GBP 500 million of free cash flow before our expansionary CapEx. I couldn't get the roundings to work so put this up to 500, nor, as you'll see later, to get the 299 up to 300. But anyway, it's still good-looking numbers. How have we used the cash?
Well, GBP 216 million has been invested to in expansionary CapEx projects and also bolt-on acquisitions. And at the same time, we've returned GBP 299 million to shareholders during the period. And it's worth noting, right, if I come back to that GBP 500 million or GBP 499 million, that figure for 2018 alone is around GBP 140 million. And of the GBP 299 million that we've returned to shareholders, GBP 88 million of that was in 2018 alone as well. So the business throws off and continues to throw off large amounts of cash, and this cash we're either using to grow the business or return it to shareholders. Chart 26 then shows. This is a slide we've showed before, have shown before.
It shows the sales development of all of our facilities open since the beginning of 2014. We've invested a total of GBP 51 million across these 12 facilities, whose sales in 2018 were circa GBP 25 million. Now, it might be worth reiterating that our new classical heat treatment plants, they're always backed by an anchor customer. We are not in the business of making speculative investments. And as I already covered earlier, in the presentation, the new sites opened since 2015, kicked in an incremental GBP 5.1 million of, contribution to operating profit in 2018. All right, coming back to the slide.
Based on our rough rule of thumb, that Stephen was talking about earlier, of a pound of investment in classical heat treatment CapEx, generating a pound of revenue, and a somewhat better ratio for that in the majority of our specialist technologies business, you'll see that we're on track to yield incremental revenues from the investments in these sites. GBP 51 million invested, implicitly, we should be expecting mature revenues from these sites well above GBP 50 million, and we're currently at GBP 25 million. But I've only pulled out the growth investment on these new facilities because it's simple and easy to identify an individual facility and map precisely the revenue relating to that facility to the investment that we've made.
I could equally be pulling out a similar picture for the total of GBP 169 million of investments in expansionary capital projects that I was alluding to on the previous slide. So overall, you should be able to see that we've, we've been making investments in this business that we have yet to yield the full revenue and profit growth from, and this should be flowing through into profit and revenue growth in the years to come. Now, I will pass you back to Stephen for the summary and outlook.
Thank you very much, Dominique. So just one slide at the end here, summary and outlook. As usual, I don't intend to go through and read it all the way through. Obviously, the last line tells you the whole story. Our expectations for 2019 remain unchanged. So that, that's, I think, where we are. Good performance, reasonably confident outlook. With that, we will take any questions.
Hi, it's Andy Wilson from J.P. Morgan. Couple of end market questions, please. Thinking about aerospace, obviously, the trend in the second half was very strong. If we think about sort of going forward, and I think you talked about it continuing at a good rate, if we're sort of thinking about a base run rate for that business, should it just be sort of aircraft build rates?... you know, kind of build rates at the, obviously, the big names, including, you know, Boeing, Airbus, et cetera. I mean, is it that level, or is it that level plus? So it feels like you've obviously won a lot more work with the big names in that space.
Sure. So if you take a background growth rate of generally passenger kilometers, you're talking somewhere in the 6%-7% long run trend. And that is a historical trend and a future trend, we believe. And a large portion of our business is probably in the aftermarket. We can't be specific about it because we charge exactly the same price for a component going into a new engine as we do for the aftermarket, so we don't really know. But historically, we've kind of been able to see that a lot of our business is aftermarket. So a portion of it, a big portion of it, is gonna be at that background run rate. But then you've got some overlaying factors, and there are two principal ones.
One is the Rolls-Royce situation, where they've had some problems. We're part of their solution. And so the growth rate for Rolls-Royce new engine build and replacement of the faulty parts that have gone out for the last few years is at a significantly higher rate than that 6%-7%. And then we've also got our increased LEAP position as well. So in total, barring any further problems with the supply chain, and we seem to be bedeviled by that, you know, one part fixes and then another part stops. But assuming that they've, they seem to have got themselves together there, we should see a slightly higher run rate overall from aerospace going forward.
And so secondly, just on the auto side, I guess, predictably, I mean, interested in kind of what you're seeing on the ground, but also, I guess, similar question in terms of, you know, should we just be thinking about IHS volume forecast? Because clearly, you've outperformed against that very demonstrably in the last couple of years, particularly, I think. So just, I guess, what you're seeing in terms of market developing and then how, again, we should think about it, please.
So I think, from a market, background market development, we see things... If you try and take out as best you can, this blip that we had from the new standards that came in, you can sort of level that out, and pretty much you've got in most parts of Western world, at least you've got a steady picture there, steady to slightly declining in Europe, perhaps. And I, I'd like to add one piece on that, actually. Diesel. So there's been quite a steep decline in diesels. But I think it's worth pointing out Bodycote's position on diesels. Small diesel, and we're talking car and light truck here, not heavy truck, right? Car and light truck, small diesels, we don't participate at all in small diesels.
Those are the ones that have piezoelectric control systems. That's not our ballgame, we're not in it. The Common Rail business, which is for the, these days, larger diesel cars, is something that we actually moved out of over the last 6 years. You might have thought that's because we knew what was gonna happen, but actually, it's not the case. The problem was that the principal suppliers on Common Rail are very, very strong on purchasing, and we found we just couldn't make any money. So we moved our resources and our assets onto different parts of the manufacturing chain. Our diesel exposure in itself is very small. When you see these automotive numbers, of course, there's a lot of correlation here from diesel declines.
Equally well, if you partition up car and light truck, you find the SUVs and light truck business, particularly in North America, where, of course, they don't have any diesels to speak of, but car and light truck business is growing quite nicely, and that is our major emphasis. That's what we do in North America. So overall, once again, I would expect our automotive car and light truck business to track slightly ahead of the general background market.
Thank you.
Mr. Douglas.
Good morning. Andrew Douglas from Jefferies. A couple of questions, please.
I thought the comment on outsourcing-
... was interesting. Are you seeing it anywhere else, apart from automotive, in terms of that trend continuing?
Yeah, I'll just repeat what you said because you might cut out. You said the outsourcing trend in automotive, have we seen that anywhere else?
Yeah, I mean, we've seen a gentle outsourcing kind of trend.
Yeah, I think, other than this issue on internal combustion engines in auto, we haven't seen any change in the rest. And so outsourcing in general used to be a theme that Bodycote tried to pursue, and we tried to go after, but actually, it's a very, very gentle trickle. And in fact, in some places in the world, they went insourcing. So overall, net-net, not much impact from outsourcing, except now we are starting to see these, at the moment, requests for proposal for internal combustion engine stuff, and that's typically associated with things like the transmission systems. And it's quite refreshing actually, that we're being asked to bid these systems, and as far as we can see, we're sole sourced on them, so it's quite attractive looking business.
Do you think that if one OEM starts, that will become a snowball effect, that actually people will see that this is the way forward?
We aren't seeing it from one OEM, we're seeing it from quite a lot of people.
Okay.
Quite a lot of people.
On the Subsea side, clearly, a good fourth quarter, and looks like FIDs are pretty hot at the moment-
Yes
... in terms of stuff. Do you think this could be a multi-year thing for Bodycote?
Ah, well-
Beyond my pay grade.
... that's above my pay grade. I can't go there. What I can tell you is that we are certainly getting a faster rate of requests. So we've got both the contracts that we've won climbing, and our shipments climbing as a result, but also the amount of requests that are climbing, and the size of the request for proposal going up as well. So this initially started with small expansions on existing fields that we'd won. And now we're starting to see bigger contract requests for larger, you know, sort of jobs. And so in many respects, the growth looks to be going up. But I am not in the business of predicting oil and gas. That's well above the line.
Yep. And then just one quick question for Dominique. You've talked about spending lots of money. Can you just talk about the guidance for CapEx going forward? I think this year is a bit higher than we've seen for a couple of years.
Yeah. So we spent a gross GBP 85 million or so last year in 2018, and we're expecting that to be in the GBP 90 million-GBP 95 million range for this year. And that's including maintenance CapEx?
Thank you. David?
David Larkam from Numis. You made a small acquisition in the year. Just talk us through that. Where does it fit in? What sales revenue? I've also noticed there's a, an associates derived on the balance sheet, so talk us through what that is. And then just on share-based payments, give us a feel for what it might be this year. Obviously, went—can't believe it went down last year, but, what's it likely to be for 2019?
Okay, so the acquisitions were a very small rounding error, really. Classical heat treatment, it's in the southeast. Fits into our network. Our strategy for these acquisitions is network infills. Basically, if we buy the competition, we get a stronger market. It's a nice way of putting it. And that's part of that strategy. Very nice fit. No particular, you know, goal beyond that, other than strengthening our market position there. The investment associates was we had one business. So we disposed the two businesses in the year. One was had come along with a heat treatment acquisition that was just non-core kind of heat treatment, had nothing to do with our kind of business. You know, there are whole huge portions of heat treatment that we just don't like, particularly bulk and commodity stuff.
And so this was a plant dedicated to that, which we offloaded to the customer. And then there was also another that was a pure sale. Then we had one of the businesses we had was an equipment builder that came with another acquisition. This was in Electron Beam Welding. So we do Electron Beam Welding services, and we had an equipment manufacturer. And what we did is we sold the Electron Beam Welding business to the management and retained a minority share in it.
The share-based payments for this year, don't we?
Well, the share-based payments this year were down on-
Yeah
... where they were last year. And that's a reflection of the fact that the outlook for the business as a whole, over the next couple of years has deteriorated compared with where we were 12 months ago. And clearly, on the basis that we're accruing, based on expectation of outcomes over the next couple of years, that meant that we needed to accrue slightly less in 2019 than we otherwise would have done.
Our outlook was a bit better than yours, though, David, I have to say.
Well, on that then, can you talk about your outlook for general industrial, the U.S. margins or North American margins? Because when do those really start to sort of kick up?
The North American margins, well, I think we've referred to before that the North American AGI margins. It's really a story of two plants, one of which we need to fix and can fix based on where it is and what it's currently doing. It's just a question of running it better and winning some more work. And the other one is a bit more fundamental, and that will involve probably moving it elsewhere.
Okay.
Hi, good morning. It's Jonathan Hurn from Deutsche Bank. Just a few questions, please. Can you just firstly, just talk about the sort of rate of cost inflation you expect to come through the business in 2019? Secondly, just looking at general industrial, if you kind of look at the, the, the growth rates in the last two months of the year, it slowed quite considerably versus the July to October period. As we go into 2019, it's definitely a tough comp in the first four months of 2019. Will GI go negative at the start of 2019?
Okay, so I'll talk about the inflation, and Dominique can do the trend analysis. On the inflation side, so 2018 was pretty heavy inflation in some areas. Don't forget that 40% of our sales is labor costs, and the inflation that we see is primarily labor, whereas our customers see it across labor and materials. So, we saw in Eastern Europe, in parts of Eastern Europe, we were handing out 18% pay increases, for example, so, you know, pretty stiff. Other places, North America, very tight market. What we're seeing now, I think, is that those inflation rates are steadying down, for sure. There's a slightly different phenomena going on, and that is the rate of benefits that are being handed out in the market is increasing, but it just...
So the cost of employment is still going up, but the cost of benefits is cheaper, actually, than pure wage increases. So we see a slowdown in the inflation rates in labor, so it'll be a little bit easier to deal with. But given, as Dominique referred to, you know, the switching costs that customers see, it's not a piece of cake to pass on, you know, price increases. I've never met a procurement manager yet that actually jumped for joy when we gave him a price increase, but yeah, it's possible, and we managed to do it, and we go out there, and we make sure that we cover our cost increases. So I think 2019 we'll see a combination of lower inflation and lower cost, lower price increases, frankly.
And then your general industrial trends, Dominique, what's your...
Well, undoubtedly, we're up against stronger, comps from, last year in the first half versus the second half. Honestly, at this stage, I wouldn't like to be that precise about a proportion of our business, half one versus half two. January and February are not the best, months for, trying to discern trends, so we'll, we'll know more, I would guess, by the time we come to our trading update in a couple of months' time. But, as H1 comparative--comparables from last year are undoubtedly stronger.
Can I say one, just one quick follow-up, just in terms of specialist technology. As we look into 2019, are there any capacity constraints anywhere within that segment at all?
... No, provided that all the equipment gets delivered on time, okay? So if there, if there is a potential anywhere, it's in HIP Services, because we've got new HIPs being delivered. These are long lead time items. At the moment, everything looks absolutely fine, so I don't see any capacity constraints. We used to have problems in S3P because, you know, it's one of the businesses that would just, just grow and grow and grow. Build a new plant, and it would fill up straight away. But we've actually, the type of plant we build in S3P now has... We've doubled the capacity, if you like. So we've got a much easier situation there. So I don't see capacity constraints at this point in time.
Morning. Michael Blogg from Investec. One nerdy, financial question from me first. I see from the cash flow that there's a GBP 1.8 million asset impairment charge-
Mm-hmm.
I think that was the number, during the year, but that doesn't seem to be in the adjusting factors, the exceptionals. So you've presumably taken it on the nose in the operating profit in part of the business somewhere.
That, that's correct, but the, you know, just so that I, I'm not misleading you to think that we've understated our numbers, there are other things that-
Mm.
... offset on the other side, and broadly, they're a wash. So we're not, we're not alluding to that specific impairment.
Can you say which part of the business it was in?
It was on the AGI side of the business.
Okay, thanks. The second question was about the chart showing the growth rates in the specialist technologies. Sorry, no, I beg your pardon, on emerging markets. So if you look at page... whatever it was, revenue progression of recent facilities. There seems to be a different profile of growth between the different years when you initiated these. So-
Yeah.
Some of these seem to take off more quickly than others.
Yeah. I mean, so in fact, we removed the... You've got to remember, this is 12 facilities over 5 years, so you've on average done about 1, 2 or 3 a year.
Yeah.
We took off the comment about on the yellows, which is the 2015, which is a plant we've got in Poland, that ramped up really quickly. Others have been slower to ramp up. So yes, there is a different rate of ramp up across different facilities.
Okay. Thank you.
Hi, it's Maggie Scully from Stifel. I just have one very quick question. It appears to me that the central costs were a little bit lower in 2018 than you had in 2017. And can you explain this and also tell us what we should be expecting for 2019?
Okay. Well, that comes back to the point about lower share-based payments. So, we had a total of... Sorry, GBP 9.1 million share-based payments in 2017, and GBP 5.4 million in this year, and a lot of that differential fell in the second half. So if you're looking at central costs, that's what you see. Actually, the central costs, half on half, were exactly flat. GBP 6.4 million cost, half one, half two, 2018.
The more unusual year was 2017, where they were 5.9 in the first half, 8.6 in the second half, and that really reflected the ramping up in the business and therefore the catch-up we had to make on the share-based payments accruals in the second half of last year. So it's all, all to do with, share-based, payments. Second part of the question, looking forward. The, our, central cost figure is the net of two items. It's the net of our gross central costs and what we recharge out to the business. It, it will, all other things being equal, it will be slightly higher, the net cost, than it was this year. But it's-- that's really reflecting inflation on the growth, on the gross cost. Any more questions, anybody?
Okay, well, with that, we'll call it to a close. Thank you very much, everybody.