Hello, and welcome to the Bodycote trading update. Throughout this call, all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Please note that this call is being recorded. Today, I'm pleased to present Stephen Harris. Please begin your meeting.
Good morning, everybody. Of course, I'm with Dominique Yates, our CFO.
Morning.
You have seen our trading update by now, I hope. As you can see, a reasonably strong start for the year so far, and it's four months, of course, not three. There are some interesting movements going on that I think we need to expand on a little, just to make sure everybody is sort of on the same wavelength as it were. One of the key issues that is happening as an overall picture here is that we're not seeing much strength in North America at all. And so, I think as you know, the way we look forward is not from order books or anything like that. We actually look backwards to look forwards.
We look at trend rates that we have seen, and those trend rates are quite helpful for us as a business. They're very informative, and so it was those trends at the end of last year that caused us to tell the markets that the outlook coming to the end of the year was positive. We still have the same outlook, but I need to just make sure everybody's aware that the trends in Europe are good. The rate of acceleration is not increasing, so I'm not talking about the growth, but the rate of acceleration of the growth is not increasing. North American growth is lackluster, to say the least. It's a fairly weak environment, which is somewhat counterintuitive to me, at least.
And so as we look forward in the year, we have somewhat a piece of caution because without the North American market starting to turn up at a better rate, life is going to be tough. So overall, we certainly aren't getting carried away by what, on the face of it, looks like a pretty strong set of results for the first four months. There's still some evidence yet to come of strengthening in North America, which we haven't seen, and I will say that's pretty much across all markets. This isn't any sector specific or customer specific specific issue, but North America is not so good. Asia is bad, but of course, our exposure in Asia is quite small.
So most of our result here has been driven out of Europe, which is a good thing, but there are two sides to every story. So that's the main point I wanted to make about the trends. I don't particularly want to go into any of the market sectors individually. We'll do that in the Q&A if you wish. The second major point I'd like to cover is acquisitions. You will note that we haven't announced any acquisitions in our trading statement. We haven't made any, which is a little bit disappointing. Some of the acquisitions that we were looking at have evaporated. The vendors no longer want to sell. You can draw your own conclusions as to why that might be. Going forward, we still have a pipeline.
I will say it's perhaps not as strong as it was, but we're still working at it, and with any luck, because of course these things in acquisition terms, it takes two to tango, as they say, but with any luck, we should land some later on. But so far, acquisitions have failed to materialize. With that, I'd like to open it up for questions, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero-one on your telephone keypad. If you would like to cancel your question, you may do so by pressing zero-two to cancel. There will now be a brief pause whilst questions are being registered. Our first question comes from the line of Andrew Douglas from Jefferies. Please go ahead. Your line is open.
Hi. Good morning, guys. I've got three questions, please, if I may. The first one is just with respect to Europe, when we're looking at the general industrial revenues, still pretty strong. Can you just give us an update as to kind of what's driving that growth out of the market? I'm assuming it's some form of inventory kind of movements, or is it market share, or are there some things you can give us there? Secondly, with respect to oil and gas, I appreciate that, you know, the year was declining as we went through last year, so the comparative period is still reasonably difficult. But can we just kind of give the thoughts sequentially on how that's improving, kind of green shoots and what you're seeing there?
And third, is just with respect to, kind of peers in the, in the sector and what they're doing. We're seeing one or two small, acquisitions coming out of, kind of startups, want for a better word, I think Z Capital Group and I think Calvert Street Capital Partners. If you can just give an, an indication of what, what you think is happening there, how that's impacting kind of the broader market. It looks like it's quite small, but, any thoughts there would be really helpful.
Thank you, Andy. I'll take the last question first, and then I'll hand over to Dominique for the others. Yes, on the acquisition side, so, there are two small, PE, entities that have made acquisitions in the period. The first one wasn't targeted, at heat treatment. This is Z Capital Group. Excuse the poor pronunciation, but that is actually how they say it. Z Capital Group, and they basically picked up a steel service center operation, which included heat treatment. It's not a business that we were interested in. It is a business that has been on the market for more than five years.
The second one was Calvert Street Capital, which is a small fund that actually had decided some time ago, almost two years now, to make acquisitions in the heat treatment space as an adjunct to their machine shop business that they bought into. And they, so up until this acquisition had been unsuccessful. The acquisition they made, very small, it's not an acquisition that we were at all interested in. And it doesn't seem to. Well, we're a little bit stunned as to why they did it, but so no, no impact on us. It is quite interesting that they did do it, and we'll see where they go in the future. But thanks for that. And as far as Europe, Dominique, could you pick that up?
Yeah. So I think as we said, our overall GI like-for-like growth is 7.6%, and Europe is stronger than North America, as Stephen's already alluded to.
Yeah.
So that's a strong number for Europe. Is there what element of that is down to inventory build? Frankly, we have no idea. Equally, it's a strong number-
Yeah
I think it would be a fairly racy assumption if one thought that there was no inventory element in there.
So let me just, sort of a bit more color on that one, Andy. If we look back in history at the way our sales fluctuate in comparison-
Mm-hmm
-to changes in the general demand out there, we always find that our, on an upturn, our initial rate of acceleration is higher-
Yes
than the market, and on a downturn, the opposite. And that is, generally speaking, an industry impact, sorry, inventory impact. So we can't prove anything, as Dominique says, we don't know.
But go on.
But the historical stats would tell you that at the beginning of an upturn, we'll get a bigger boost because the people do start doing an inventory fill.
Yes.
One would think that. What we can say is that the GI stuff is not coming from specific market share or customer wins that we can put our finger on.
Okay, okay. Okay, thank you. And oil and gas?
On oil and gas, well, we haven't seen any upturn in our business yet. Including we're still anniversarying against a period last year when the business was still declining, and hence we're seeing negative numbers in terms of the year-on-year comp.
Yeah.
What we are seeing is more activity in terms of requests for quotes, but that has yet to turn into concrete new business for us. So, there are some signs that there may be some stuff to come, but we have not seen it yet.
Okay. Thank you, guys.
Thank you.
Thank you. Our next question comes from the line of Michael Blogg from Investec. Please go ahead, your line is open.
Good morning, gentlemen. A couple of questions from me. One, the first is just to try and check my mental arithmetic. I think all of the acquisition impact is in AGI, correct me if I'm wrong, and that being the case, it looks as if like-for-like revenue increased by about 6% in the first four months. Does that sound right?
6.2%, yes.
Oh, good.
Yeah.
Okay. It did work. The second question is, are there any issues around margins, either relating to mix or to input costs?
So you mean anything that's an anomaly, as it were?
Yes.
I don't think one could take that assumption. No, I think there's no surprises at this in margins. You will appreciate, of course, Michael, it's quite hard to talk about margins because our business is actually quite seasonal.
Yeah.
So lots of waves in it as we go through the various months. And because of our, the nature of the operational gearing and the fixed cost model that we- the semi-fixed cost model that we have, spotting a margin change in one month overall from the month is pretty tough. What I can tell you is that there's nothing of significance on the cost side or any anomalies that would cause us to think that margins wouldn't be where they w- where they were, are going to end up. We can... Is that, is that clear? Bit muddled, but, there's basically nothing that we can see at the moment to cause a concern on margins. They're going where we expect them to be.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Mark Davies Jones from Stifel. Please go ahead, your line is open.
Thanks very much, and morning, both. If I can just pick up on that last one and get back to the mix side of things, are the mix between the specialist and the classical sides of the business evolving kind of as expected? And are there any mix headwinds there, if the oil and gas piece within that specialist bit is still somewhat depressed, so is that slightly offsetting any kind of operational leverage? And then just on the U.S., you say you're surprised by the continuing weakness there, and I guess we've all been a bit surprised by that. Is there anything specific going on in the U.S. automotive market that's obviously been an area of concern, and in Q4, you were still quite upbeat about your exposure there. Has anything changed on that front?
So, yes. Thanks, Mark. Specialist technology, good question. Specialist Technologies are going nicely. The piece that is perhaps, you know, not as good as the rest is the one that you would think, which is oil and gas, particularly as we've got a large exposure to subsea in Specialist Technologies. And that market, if we could talk about green shoots in oil and gas, the green shoots are very definitely onshore. Offshore is still, well, if I put it politely, a lot of gossip. Nothing that we've actually seen appearing at our doorstep, although we are aware of projects getting released, they haven't come to our stage of release yet.
So the lack of growth out of that part of the Specialist Technologies is an issue, not a massive issue, but the rest of the Specialist Technologies are actually doing quite well. So overall, I would expect as time goes by, unless trends change, the Specialist Technologies will be, if anything, enriching in the mix. Does that answer your question on that point?
Yes, thank you.
On automotive in North America, so automotive in North America for us has been a little bit weaker than we would have perhaps have expected, but it's nothing to do that we can see with the market. One of the issues that we have, issues is a bad, bad term here. One of the characteristics of our North American automotive business is that we have, over the past half a dozen years, moved on to larger and larger direct contracts with OEMs. The issues with that kind of business, I mean, they're not massive, but they're larger contracts from other parts of the business, is that if you get a contract delay in startup, it has, an impact on your, on your numbers that is more than perhaps other parts of the business.
Not big issues, but where we see the lack of car and light truck growth in North America, we're not putting that down to any issues that people report on in terms of vehicle production, because we're on very, very specific programs. And the issues that we have are associated with the OEM delaying, not deliberately, but delaying contracts from where they originally said they were going to be.
Okay. Thanks, that's very clear.
And we don't expect that to continue much longer, so it's a short-term issue.
Thank you.
Thank you. Our next question comes from the line of David Larkam from Numis Securities. Please go ahead, your line is open.
Excuse me, please. Firstly, just on the cash flow, I mean, normally consumptive this time of year, so apart from a new finance director, what's sort of driving the cash generation over the period? Secondly, can you just talk a little bit about energy costs going in? You sort of touched on it briefly, but any headwinds there, are those being passed through? And then just talk a little bit about the comps for the year. Obviously, Q1 last year was pretty weak. I mean, just how much more difficult do they get as we sort of progress through the year?
Okay. All right, looking at each of those. So, cash flow, it has been strong in the first four months. We generated GBP 9.5 million of net cash against an equivalent period last year where there was an outflow of GBP 2.6 million. But as we said in the statement, we've managed working capital well during that period as well. There will undoubtedly, though, be an element of drop through to margins and profitability, given that we've experienced 3.9% like for like sales growth through that period as well. But on the energy costs, I think, I mean, there's nothing specific really to note there. And as you know, we don't engage ourselves long term on energy costs.
So there is a read across from any energy cost movements into our pricing, but there's no significant movements on energy costs to note so far this year. And on the comparables, as we go through the year, they will get gradually more tricky because it's undoubtedly the case that last year, the weakest period of our business was the beginning of the year, and it strengthened through the year, and you saw that with our results announcement. At the back end of the year, you can see what that progression was in terms of percentages performance from the quarters, and that's the extent to which our comparables will get more difficult as we go through the year.
You'll remember, of course, that from an energy cost standpoint, for us, that's electricity and natural gas, it's not oil. And the electricity prices move with a mind of their own, as it were, doesn't seem to be related to anything other than government taxes in many parts of the world. The other thing to note is that the consumption of energy is pretty steady. It doesn't actually flex in line with revenues. It's quite astounding that you can have quite a large uptick in throughput in our systems, but the energy costs don't go, the energy usage goes up very, very little. So from that perspective, you get a positive effect on rising sales from energy efficiency, which does tend to offset any modest increases in prices anyway.
Sensitivity to energy price increases, electricity and gas, is pretty low in our business.
Just briefly on that working capital, is this something which you think you know, is a medium-term trend, that you can improve your working capital terms, and we should see a positive number for the year?
Well, no, you can't improve your working capital continually, clearly. It's something that we think we've managed reasonably well in the first four months, but as I say, you can't continue to benefit from working capital movement, so I wouldn't extrapolate anything going forwards.
Okay, thanks.
Thank you. Our next question comes from the line of Jonathan Hurn from Deutsche Bank. Please go ahead, your line is open.
Hi, guys. Good morning. Just a few questions from me, please. First, can you just give us a little bit more color on aerospace in Western Europe, where that strength is coming through? Is it more based in the U.K., or is it we also seeing strong growth coming through from France? That was the first question. Second one was just on acquisitions. If we look at the landscape right now, there's obviously some big mergers going through in or between some chemical companies out there, and there may be some bigger assets that might come out of that that are available to be bought. Would you consider doing a bigger deal? So I think most of the talk recently has been more focused on doing smaller deals. And thirdly, just lastly, was just on the organic.
Can you just give us a sort of a rough split between volume and pricing in that, please? Thanks.
Sure, Jonathan. So aerospace, in rank order terms, U.K. is strongest. France, second strongest, driven in the first instance by Rolls-Royce. And the Rolls-Royce growth is exactly the same issue I talked about at our last trading update, yeah, for the full year results. And that is a combination of Rolls-Royce, first of all, build rates going up internally, but also adjusting for perhaps what might well call sins of the past. So very strong at Rolls-Royce. And frankly, Rolls-Royce is a pleasure to work with these days. Into France, that's Safran Group primarily, and Safran Group is doing well. They're in the process of expanding their supply chain, even mostly, I think, for insurance reasons.
In other words, they're a little bit concerned that their growth is gonna overtax some suppliers. But, for us, that's all good news. So Safran, good, healthy growth there. U.S., no change, pretty lackluster, as we said before. The acquisition question: Do I decode chemical company as gas company?
Yes, I suppose you could do, yes.
Okay, yeah. I think the answer is we'll take everything on its merits, and if the particular gas company manages to throw off a non-core asset, that it happens to be in our space, if I can put it that way, it's something we would seriously look at, provided we could get a good return out of it.
Great. Thank you.
Well, on the volume and price, as you know, we've got a very good track record of increasing prices in line with, if not slightly ahead of inflation, so that it ends up being a slight positive. We're not seeing masses of inflation coming through in our business yet, albeit, you know, there are some headlines around that, that there may be some price increases, so some inflation to come. So, there isn't a significant element of price within that 3.9%, organic, as well.
Okay. Thanks, guys. Thank you.
Ladies and gentlemen, I'd like to remind you that if you would like to ask a question, please press zero one on your telephone keypad now. Our next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Yes, good morning. Thanks for taking my questions. Firstly, on General Industrial in North America, Stephen, could you tell us how was the performance in the period?
In terms of growth?
Yes.
It was +1.3%.
Great. Thank you. And, a broader question on the comps discussion. Obviously, optically looking at the H1, H2, 2016, there was a higher, a larger decline in H1 and a small decline in H2, but that is just a mirror of what happened in 2015, and the downturn started in the second half. And then go back to 2014, that was an even year. So thinking about it in terms of a monthly or daily, sales run rate or activity run rate, the 2016 performance, I think, wasn't too different. It wasn't like we had a sequential, tick up, during that period, from how I see it. That would create a real underlying tough comp effect.
Could you comment on that?
Yeah, I think-
2016 is really tough comp in the second half.
I think, so, we need to disaggregate a little bit here because the GI stuff is something that moves slowly. And in fact-
Mm-hmm.
... if you take that out of all the other numbers here, I mean, the GI trend, as I, as I've said many times, has been a slow, steady decline until fourth quarter, 2016. And then it just started bottoming out, and as we came into the last month and now into this year, it started turning up. So, it's not quite the way you described it in terms of 2015 and 2016 when you look at GI, which is this, you know, 40-odd% of the business. So it's just a slightly different pattern, because there are other things that have affected the rest of the markets, which are far more focused.
Yeah, I mean, I think your more general point is a fair point. It's, you've always got to work out what, what's your base year? What's a normal year? And unfortunately, there's never quite an absolutely normal year where nothing's happening, quarters on quarters. The general point is to the point that I was making earlier about you look at how the quarter on quarter growths were looking through last year, and that's the impact on the comparables. That may be a fair point, that the second half comparables aren't quite as tricky then as I may have characterized earlier.
Okay, that's, yeah, that's very helpful. Thank you very much.
Thank you. Ladies and gentlemen, if you do have any final questions, please press zero one on your telephone keypad now. We have a question coming from Robert Davies from Morgan Stanley. Please go ahead. Your line is open.
Hi, morning, everyone. A few questions from me. First one was just around FX. So I just wonder if you'd give us an update. Obviously, currency's been moving around a bit since the end of the year. What your expectations are for the FX impact on sales over the full year? Second one was just around the general industrial business. I wonder if you could sort of flesh out with a little bit more color in terms of the bits that are getting better or worse for you. And I know you sort of cover a lot of different markets. Is there anything in particular that sort of stands out there? And then finally, my question was around just your headcount.
Has there been any increase in headcount lately with a sort of uptick in the business, or is it just all sort of managed through the changes in sort of temporary labor or your current workforce? Thanks.
... Sure. Dominique, do you want to pick up the FX point?
Yeah, on the FX, currently the dollar is standing at $1.29 at the moment. Mm-hmm. I think, and at the time we were going out with our full year numbers, it was around $1.25. So that's what? 3%-4% stronger sterling than it was then. That will undoubtedly have an element of translation look through if that rate now maintains itself for the rest of the year. But, you know, currency fluctuates, so frankly, who knows? Yeah, so that's the order of magnitude. If it stayed, you know, if you've got 3-4% movement for two thirds of the year, then it's gonna be a 2%-3% impact on the overall numbers.
Okay, so let me just pick up the other two points then. I'll do headcount first. So, comparing to the same period last year, there is a small uptick in headcount, but that's come through the acquisitions, as opposed to anything else. The underlying headcount otherwise is in the same place as it was at the end of the year in the last quarter. So we're not actually putting in extra costs, which is what I think your question's going to. So we're still in the point where we get, we have good gearing on labor, as we talk about in the short term. So, no real upticks in labor at this point in time, and there's always daily noise in this stuff.
That's what we manage through with the temporaries. I mean, one can see around Easter, for example, you know, your temporary workforce is extremely important at that point of period of time. So no issues on the headcount front. Costs are not going back in at the rate at which sales are growing, are rising, if that is where your question went. Mm-hmm. In terms of the GI story, what particular sectors? I'm afraid I've got a very boring answer for you, and that is that there is nothing that you can pull out of the data, any one sector is going more than the other. We've got it geographically, which we've talked about, but otherwise, it's a very broad front.
We still have a little bit of a lag on agriculture, but we expect that to turn soon because agriculture is a seasonal business, and we're just coming into you know, the period where we'd see that turning up more. We haven't seen it yet, but otherwise, can't pull anything out of the mass of markets that are there, saying this one's very strong or this one's weak.
Okay, great. Thanks for that.
Thank you. As there appear to be no further questions registered, I'll return the conference to our speakers.
Thank you very much, everybody. I know you've got an exciting day for the rest of the day, and we'll see you again soon. Bye then.
Cheers.
This now concludes our conference call. Thank you all for attending. You may now disconnect.