Okay. Good morning, everybody, and welcome to the Bodycote 2016 full year results. My name's Stephen Harris, as you probably know. I'm the Chief Executive. On my right I have Dominique Yates for the first time, our new CFO, who's joining me for this presentation here. So the agenda this morning: I'll give you a quick overview and then hand you over to Dominique, and then I'll come back and do a review of the business and go through the summary and outlook. So just from an overview standpoint, revenue on a like-for-like basis, we saw a decline of 3.5%, but that actually covers over quite a few movements underneath.
I think the biggest issue we've got is if you take energy out, which declined 27%, then the rest of the group ended the year flat, and you'll recall that that's after a pretty sharp decline in the first half of the year. So you can see a lot of things change as we got towards the second half. Headline operating margins, despite the revenue decline, they were very resilient at 16.6%, down from the 2015 number of 18%. And notwithstanding the fact that we did do a special dividend and our ordinary dividend and bought some companies, we still ended the year with GBP 1 million of net cash. On the investment front, we've kept CapEx going, 1.1x depreciation. You'll recall that something less than half of depreciation goes towards stay-in-business capital, maintenance capital.
So there's quite a lot of expansion capital that's being deployed still, and we expect to keep doing that. We did buy five new sites, spent about GBP 30 million on that. Our specialist technologies, which we've been talking about for some years now, continue to move ahead, and they actually are now contributing 42% of our group operating profit. Final dividend is up 4.9%, by GBP 0.108. Just to note, we're not actually recommending a special dividend this year, and that's because we have quite an attractive acquisition pipeline ahead. We'll come back to all of these points later on in the presentation. So with that, oops, I'd like to hand you over to Dominique, and he'll go through the numbers.
Thank you, Stephen, and good morning, ladies and gentlemen. Overall, 2016 was a challenging year for Bodycote. Chart six summarizes the group's results in the year, and you'll see that at constant exchange rates, sales were down almost GBP 27 million against 2015, or almost 5%. Various perimeter changes mean that the underlying sales decline was only 3.5%, as Stephen's already highlighted, but nonetheless, this sales decline dropped through to impact headline operating profit, albeit with a reduced impact as a result of improving business mix and tight cost control. The chart also highlights the positive impact that weaker sterling had on our foreign currency-denominated results, and this impact largely offset the underlying decline in operating profit. Margins declined as a result, but we still delivered a credible 16.6% margin at the headline operating profit level.
The absence of some benefit from recognition of tax losses that we enjoyed in 2015 pushed up the group's headline tax rate to 27.5%. Bodycote's tax rate is, as you know, heavily dependent on the performance mix of our business across a number of key markets with differing corporate tax rates, and it's very difficult to forecast for 2017 at this stage of the year. That said, we're using a headline tax rate of 28.5% for internal modeling, up from 27.5% in 2016, as our business mix has moved towards some generally higher tax rate jurisdictions. As a result mainly of the higher tax rate that we saw in 2016, headline EPS dropped 6% to 37p, and return on capital employed fell by almost two percentage points, with this measure reflecting more directly the underlying operating profit result.
Moving on to the divisional summary now, we see the aerospace, defense, and energy numbers on chart seven. This division was heavily impacted by the more than 40% drop in our oil and gas business, reflecting the weakness in that market. But strong cost discipline mitigated the decline, and headline operating margins held up well at just over 22%. Stephen will come on to talk more about some of the individual market sectors a bit later. For automotive and general industrial division on chart eight, we see here the knock-on impact on our general industrial business from the weakness in the oil and gas and other commodities sectors, albeit the like-for-like sales decline was restricted to just 1.8%. In line with our strategy to bring AGI margins up towards the ADE heat treat margins, we also see the positive impact from business mix.
This is with continued application of the Bodycote margin model and strong cost control, as well as pricing discipline. As a result, the divisional margin actually increased once again in spite of the decline in sales. And I look back to see what the trend of that margin has been, and actually this just reflects a continuation of an unbroken trend of improving AGI margins now since 2010. So I think that's a pretty good result in the context of the sales drop that we saw. Chart nine shows the headline operating profit bridge. So in spite of the decline in underlying sales that we've just talked about, the maintenance of price discipline meant that we were able to more than cover the impact of cost inflation on our input costs. So we have a GBP 1.6 million + impact there.
It also shows that in spite of the positive mix that I described earlier, we were hit by the sales decline, albeit that was almost entirely offset by the weakness in sterling, which added GBP 11.2 million back to operating profit. Central costs increased by GBP 1.4 million as we invested in our business development function and continued to upgrade our ERP. Chart 10 shows the development of free cash flow. In spite of a drop in net income, increased depreciation, mainly from the translation effect of weaker sterling, resulted in an increase overall in EBITDA. Headline operating cash conversion was 92%, and consequently, the group's free cash flow improved by GBP 14 million to GBP 61 million in the year. A good result. Moreover, it's sustainable.
It's also worth bearing in mind, and Stephen will come on to talk about this later, that our free cash flow definition is after significant growth capital expenditure investment, which is roughly half of the total CapEx spend, and obviously which should help us grow our top line in future years. We showed chart 11 at the interim stage. It highlights how movements in the value of sterling will be reflected in the sterling translated results of our business. It also reflects, as you compare this with the interim chart, that our euro business has been relatively stronger in the second half than our U.S. business, mainly as a result of strong performance from the European automotive and aerospace businesses in the second half. As we've already seen, the group benefited significantly in 2016 from the weakness of sterling.
However, given that the drop in sterling was mostly after the June 23rd Brexit referendum result, if rates continue throughout 2017 at the closing rates for 2016, and that's roughly where we are still today, we should enjoy a further GBP 6 million incremental benefit to the operating profit result. Finally, on chart 12, I thought it might be interesting to share with you the key reasons why I thought Bodycote was a good company to join. Firstly, over the cycle, the group has strong margins supporting a healthy return on capital, and what's more, this is converted into cash, as we've already seen. It's got a great market position, and its scale and network advantages give it the ability to invest and specialize at plant level, enjoying good capacity utilization levels on expensive bits of kit.
This is while still offering customers a diverse range of services through the plant network. Now, at the same time, this advantage should also provide a compelling financial logic for bolt-on acquisitions, and we've seen some of those come through in 2016. It should indeed, furthermore, allow us to convert in-house heat treatment, which is still where the majority of heat treatment is done today as a non-core activity, into additional business for Bodycote. While the company is primarily a service company, it does have some clever technologies where it has an edge as a result of either know-how or experience, and these should help deliver revenue growth above the background market rate over time, with the consequent positive impact on profits and margins. Finally, the markets that Bodycote serves are cyclical.
With the depression in the oil and gas market, I believe we're in a bit of a trough at the moment, and that's had a knock-on impact as we've seen also on our general industrial business. But the nature of cycles is that there are peaks as well as troughs, and the average over the cycle is somewhere between the two. The company has demonstrated over the last few years its resilience on the downswing, and I think the prospects for profit margin and return delivery as things improve and over the full cycle more generally are positive. With that, I'll hand you back to Stephen now to go through the business review summary and outlook.
Thank you, Dominique. A little bit disappointed that he didn't say that the chief executive was such a fantastic person and that's why he joined, but never mind. I had to give him a bit of training. Okay. Moving on. So I'm going to go through a segment-by-segment review with you. So aerospace and defense first. On these charts, for the first time, because of the currency movements, I'm showing you the revenue progression in constant rates and then also at actual rates. So you can see the impact of the exchange rate movements. So if we take aerospace and defense, like-for-like growth of 1%. Underneath that, we've got very strong growth in the United Kingdom, particularly in the second half. As you will know, our U.K. aerospace business is dominated by the supply chain for Rolls-Royce. We are doing very well there.
We've got a lot of growth in sales to that supply chain. While we ourselves don't have great visibility, our customers, in particular Rolls-Royce, do. We've been asked to gear up and expand capacity quite strongly, so we have quite a good outlook in this sector in the U.K. going forward. In France, we rely heavily on the Safran Group. This is doing very well. It's been doing well for a number of years, and it continues to do well. France is a great business for us in aerospace and defense, particularly civil aerospace. North America's been a bit more mixed, and what's going on here is quite interesting. An important point is our position on the LEAP engine is much bigger than it was on the CFM56. As the engine platforms transition over to LEAP, we should see really good growth coming through.
At the moment, we aren't seeing that. We're seeing quite a mixed picture. And a lot of that is because the primes are adjusting their supply chains, and we supply right through the supply chains. And so in some instances, we've got customers who are losing out. They're actually having business taken off them. And in other instances, they're being given more business. And so we're seeing it change all around. So right now, it's quite unsettled in North America, but our expectation is as that supply chain situation settles down, we will start seeing some good growth. Taking a look at energy, of course, this has been the villain of the piece for a few years now. Oil and gas, in particular oil, that's a very well-known story, I think, for everybody. Energy, like-for-like decline of nearly 27%.
What we are seeing, though, is oil and gas is now stabilizing. Just to put a little bit more color on that, specifically, we're seeing onshore oil and gas is stabilizing. We're seeing a pickup in the oil sands. We're seeing a little bit of a pickup in fracking, but it's very much at the trough. When I say pickup, please don't get me wrong. I don't mean it's surging ahead. It's troughed by the look of it. I will say offshore oil and gas is more mixed. It's very hard for us to see what's happening there. It's a moving feast. Overall, I think we're seeing the oil and gas sector has stabilized, which is good news. Pretty much the other energy sectors are flat. I will say that our energy business is still achieving single-digit margins, notwithstanding the decline that we've seen.
If we're talking about declines, I mean, our oil and gas business used to be GBP 60 million in sales. It's now down to GBP 20 million. So it's been quite a rough ride there. Of course, when it comes back, we will see a great drop through from the extra sales that we get. Moving on to automotive. Like-for-like growth here, 1.6%. Just a reminder, the automotive, a main driver for us, is the drive for fuel efficiencies. That continues to drive project work for us and programs that mean our revenues grow above the background production rates. If we look at car-and-light truck growth, we've seen accelerating growth in car-and-light trucks. In the first half, we had 3% growth, and in the second half, that grew to 6%. It's really going well.
We've got some new programs coming online, particularly right now in Europe and in Mexico and some in Detroit. We expect to see that picking up as we move forward into 2017, 2018, and beyond. Some of the programs that we've got don't even come on stream till 2019. So very good picture in the automotive space. The specialist technologies helps a lot in this area. So our low-pressure carburizing business is doing very well, and that is being used on these advanced drive chains that we're seeing going down. The only negative part of automotive has been our heavy truck business, which has been quite weak, like a lot of people in this area. So if we look at general industrial, you will recall, if you've been following us at all, that general industrial's been a downward trend for over two and a half years.
Every time I've stood up, I've been talking about 3%-5% declines. It's a lot of different customers here. It's a very wide waterfront, and it's not an area that changes very rapidly. It just moves with a huge amount of momentum. What we saw in general industrial was a bleed through from the downturn in the oil price and general commodities that weakened general industrial demand right across the piece. General industrial is really the closest proxy we have to global industrial production. Now, what we're seeing in general industrial is that decline has significantly reduced. So by the second half, we went from a first-half decline of -5%. The second-half decline was only -1%, which I take as very good news. This is nearly 40% of our business.
And if we can see general industrial start to turn up, that will be very good news for us. As far as geographically, it's pretty much across the piece. There's no particular area of boom or bust. It's general right across the piece. I will say Europe is slightly better than North America. And just looking at our Specialist Technologies, which continue to forge ahead, so Specialist Technologies now make up 42% of our group operating profit. We first introduced these as a concept about seven years ago, you might recall, when they were pretty much a gleam in people's eye. Now they are significant in the group and continue to be so. If you take out the impact of the oil decline, which severely impacts two of our businesses, the rest of Specialist Technologies grew at 8%, and they will continue to grow going forward.
Now, I like this graph. I don't know about you guys. This is, in fact, the trend through the year of revenues. And as you can see, it's been quite an impressive trend. We've gone from a couple of years of pretty sad decline, to actually what we're seeing now is some growing momentum. And that actually has continued into 2017. So it's a nice picture that we're looking at. Just to give you an idea of where we're spending our money from a CapEx standpoint, I'm not going to go through in any detail in these maps, but you can see there's quite a frenzy of activity in our Classical Heat Treatment area where we're expanding. And generally, in Classical Heat Treatment, this is all customer-led. People ask us to put down new facilities, and they ask us to expand. We don't do it speculatively here.
We have long-term agreements that we'll sign up, build a new facility for people, and away we go. Quite a lot of activity going on. If we turn then to the Specialist Technologies, there's even more activity going on here. Now, this isn't customer-led. This tends to be our own ideas as to where we go. Things like stainless steel processes, S³P, we have this situation where we build a plant, and in short order, it fills up. What we're doing is plotting forward where we put our new facilities, where we expand. Exactly the same in low-pressure carburizing, although there is quite a bit of customer-led expansion in LPC. HIP is a long-term game. We plan three to five years out because the delivery times on HIP vessels are so long.
We're actually looking at the markets three to five years out to put expansion in there. We've just put in a very significant expansion in Europe into aerospace because you have to qualify these vessels into the aerospace market. And there's been a big expansion there because the use of HIPing in aerospace for new materials has actually gone up quite a lot. So a lot of investment going on, a lot of expansion. If we look at our acquisitions, which happened in the last four months of the year or so, so we spent GBP 30 million, run it out of free cash flow, acquired five new sites. They're all in the AGI business. Now, each of the sites is listed here on this slide, and you can see some reasons as to why we bought them.
I think an overriding issue in these bolt-on acquisitions is that they all add to our local cluster strength. What you find is that if we own all the facilities in a local area, then we have great pricing power and good markets. So our expansion is based around micro-markets and actually getting better control in those markets. These fit the strategic crosshairs very well. The combined revenue of these businesses is about GBP 20 million, and we expect them to have average group margins going forward. We will have more acquisitions going forward into 2017. If we just look at managing through the cycle, I mean, we're coming, one hopes, out of a down cycle so far. What happened? Well, you can see it hit our sales, it hit our operating profits. The key issue for us is managing headcount.
Headcount makes up about 40% of the cost of sales and not cost of sales. It's 40% of our sales value is the cost of people in the group. By keeping our workforce very flexible and managing our headcount in line with demand, we keep our margins up. That's not something we could have said that we did very well in the past, but it's something that we do work hard on these days. And so we've actually managed quite a resilient margin performance through these last few years. Went the wrong way. Just looking at cash flow and capital allocation, just a reminder of what we do here. So it is a very cash-generative business. We do convert a lot of our operating profit into cash. We're, I think, one of the highest cash conversion outfits around and have been for some time.
So the first call is for our stay-in-business Capital, maintenance capital. And so we spend a chunk on that. And then there's our expansion, organic expansion. After that, we go to our ordinary dividend, and then we spend anything that we can on useful M&A. So if it's going to contribute to shareholder value, we will go and buy things. Just a reminder of our acquisition strategy, we have two prongs to it. The first is in our Classical Heat Treatment business, where we're doing small bolt-on acquisitions. There's nobody large to buy in Classical Heat Treatment. We're doing small bolt-ons in our existing territories, strengthening our network. And that's what you've seen at the end of 2016. The second half of our strategy is in Specialist Technologies. By definition, these are much, much rarer targets.
There are a few larger ones out there, but bringing them to the table is quite difficult, as you can imagine. So two prongs to the M&A strategy, and we have a quite encouraging acquisition pipeline looking forward. And that's the reason why we elected not to recommend a special dividend for 2016. And then, as you can see from this, in 2016, we ended the year with GBP 1 million in cash. So in summary, as you can see from some of the graphs there, the momentum is built during the year. As we got towards the end of the year, we actually saw some very nice growth coming through. The oil and gas headwind that we've seen for a while is abating. We seem to be troughing in the oil area, for sure.
We expect, if we keep the exchange rates kept at where they are today, we expect to get something like a GBP 6 million benefit in 2017 from the exchange rates. In terms of our business development activities, we continue to invest in expansion in both our classical and our specialist technologies. And of course, specialist technologies keep forging ahead, 42% now of group profit. Acquisitions, we bought five sites. That's going to contribute average margins of about GBP 20 million in revenues in 2017. And then cash flow was pretty strong, GBP 61 million of free cash generation. And that's after. We calculate that after our expansion CapEx. Moving on to the outlook, I'm not going to read through the outlook. It's there for you in black and white. It's in the press release. I would say overall, you can see that we're pretty positive looking forward.
With that, we'll take a quick break, and then we'll come back for questions. Thank you.
It's Harry Phillips from Peel Hunt. Several, please. In terms of.
You only allowed one, Harry.
It'd be a very long one then. In terms of, you used the word encouraging pipeline, how imminent should we expect it to be? Secondly, in terms of startups, they cost you GBP 1.5 million in the year. Should that be a number we take for every year? In terms of Wichita, the sort of changes in bizjets, sort of how big is bizjet for you, and what's the update there? And then lastly, obviously, you've got a competitive aggregator in U.S. heat treatment. You've actually seen them on the ground in terms of potential M&A.
Okay. Let's do that in reverse order then. So in terms of a competitor in the U.S., that's a theoretical competitor. They haven't done anything. It's a private equity-backed outfit. We really haven't seen them at all. That's not to say they won't do anything. But private equity, this isn't a great business for private equity. It's quite difficult doing financial gearing on an operationally geared business. And the private equity people that came into the industry back in the early 2000s pretty much all went bust, every single one of them. So it's a tough area. And to date, we haven't actually seen any competition from the U.S. guy that's advertising themselves. In terms of bizjets, that was really a first-half aberration. It's very small for us. I wouldn't pay any attention to it, actually. Startup costs, pass on that one. I don't know if Dominique's got a view.
What?
I don't know.
Yes?
I'm not sure there's adding much, but it will depend on.
What we're doing.
What we're doing.
Just to give you an idea, it costs us about GBP 5 million to build a facility, and it takes about two years to get it fully on stream. So startup costs, I mean, that's revenue costs. The CapEx is probably about two-thirds of the total cost as an order of magnitude, right? In terms of our acquisition pipeline, when? Well, we said we would go back into the acquisitions about 18 months ago, and it took us just over a year to actually bring anything home. So that was filling the pipeline up. We can never call acquisitions, but I would hope that we'll be starting we'll be doing some in the first half this year. I would hope.
Okay.
Can somebody else have a question now? Is that all right, Harry?
That's fine.
Okay. I've got Michael in the front row here.
Thanks. Good morning. Michael Blogg from Investec. You mentioned the margin model, and that's been a feature of the last two or three years. While Topline has been under pressure, presume you're not taking your foot off the gas on that going forward. And can you give this is a bit of an open-ended question, but can you give us some feel for how much there is still to go for on the first hand? And secondly, you've bought, I think it was three German businesses, and you're talking about average margins. Does that imply that they're actually doing rather better on that front than the ones you had?
Okay. From the margin model standpoint, you will recall that the way we've deployed the Bodycote margin model is with an offline tool. We actually have to go in on specific issues. We go into a plant. Yeah, once a plant knows how to use the tool, it happens about every three to six months in that plant. Now, actually, the real use of this would be on a real-time basis because things are happening every day. We get new customers every day. You should be pricing and costing those customers on a daily basis. That is something that is being deployed in our new ERP system, which actually is going live this year. It'll take us nearly two years to go live around the world. We'll see a transformation in the Bodycote margin model adoption rates.
We'll be going live on a real-time basis, and it'll take two years to get the whole group up and running. How much is there in that in terms of margin? Don't really know. I mean, if we knew, it would be great, but we don't really know. What I can tell you is what we've said before, is that there's no fundamental reason why the AGI margins shouldn't be up around where the ADE margins are. That's where we said four or five years ago, we were going to start moving those margins up, and we've been doing that consistently. So where will the AGI margins go? They should be heading towards 20% for sure. It's just a question of how quickly we can get there. The new businesses that we bought, are they better margins than the average in Germany? Yes.
Is there scope also in the ADE side from doing the same thing?
We're not trying to move ADE margins up. We think the ADE margins are where they should be. Our issue in ADE is to generate growth and not try and improve margins. It's the same in specialist technologies. We're definitely not trying to improve specialist technology margins. The idea is grow and grow and grow. I think that's what it's about.
Okay. Thank you.
Hi. Good morning. It's Jonathan Hurn from Deutsche Bank. Just one question. If you look at the 2016 profits.
70% beneficial interest coming through from pricing. Can we expect that kind of level to continue in 2017 to sort of supplement this year?
So, Jonathan Hurn, the situation on the pricing is that you'll remember that every six months when we put that bridge up, we always beat our cost increases with the pricing. And sometimes we beat it by a little bit, but it's always a beat. And that is symptomatic of what is a very strong pricing power that we have in the business. I will say we're not alone in that. Everybody in this industry has got strong pricing power. It's quite difficult to switch between suppliers, and the switching costs are very high. Exactly what the amount is you should build in, I don't know because it varies year by year, but it will be positive. I can't recall it being negative, frankly. It's always something that we insist on.
People coming to do their budgets, if they're not showing an expansion of margin through pricing, they get kicked out and come back again with a better answer. That's the way we work it.
Just to be clear, though, it's not 2%. It's GBP 1.6 million+ , and that is the net of GBP 4.8 million+ on pricing and incremental through to GBP 3.2 million on costs. So it's the best part of 1% on pricing and 1% on the cost base.
We don't go out there and say we want X% in price. What we do is we use the Bodycote margin model. We see where we've got insufficient margins, and we ask for price increases there. And then generally, we'll go out and just cherry-pick in different territories and increase prices. We don't tend not to do across-the-board pricing.
A couple of questions, please. Firstly, can you just talk a bit more about the central costs? I can see a little bit on the profit bridge, but why that increased so much and what to expect going forward. Secondly, can you just talk about the new plants you put in? I haven't had time to look through the diagrams yet, but how many were in 2016 and how many more for 2017? And then finally, trying to cut Michael's question slightly differently, if we look at the specialist technologies making their great margins and 42% profits and split that out, the rest of the group looks like it's making sort of 12%-13% return on sales. Should that not be higher?
Okay. You got me there on the last point. I'll have to examine it that way. I haven't looked at it that way because, I mean, I'm just going through the different pieces, and I know there's quite large parts of it that are much higher than that. So I don't know how the math looks. I think it's because you're looking at margins after central costs, and we're quoting margins before central costs is my guess, all right? So when we quote 30% margins or 22% margin, that's all before unallocated central costs. So if you take the unallocated central costs and correct me if I'm wrong, Mr. CFO, but if you take the unallocated central costs out of the picture, you'll find that those margins that you just produced are much higher than that. Okay?
There will be an element of unallocated central costs allocation to get to those margins when you're doing that calculation.
I mean, that is definitely the answer. Yeah. What was the other question?
On the central costs.
Central costs and.
Well, we've certainly invested something behind the business development function. We had to beef up our resource in order to bring some of those acquisitions home. But the main element is increased spend overall on our ERP. And there will probably be more, as we're rolling out the ERP and beginning to depreciate it, that will also have a little bit of upward pressure on central costs going forward as well.
New plants, how many went in in 2016? How many planned for 2017?
Gosh, I've got me on two there. Don't know. We'll have to get back to you, but I mean, it's a handful. And yeah, the startups go over two years. So there are ones that are being worked on right now that will be in 2017 in terms of coming forward. I mean, I could think of the Eastern European ones for sure. I don't think the China ones will be. Eastern Europe, Mexico, they'll be certainly in 2017. Okay. So that's Poland, Czech.
Hi. It's Andy Wilson from J.P. Morgan. Just a couple of quick questions. You showed the headcount reduction that we've seen over the last couple of years, and just thinking about, obviously, the potential for, if we're optimistic, a big bounce back in, for example, oil and gas, you just talk about sort of I know you alluded to very good leverage, and I'll obviously offer you the opportunity to put a number on that. But in terms of the cost coming back into the business, can you just give us an idea of how much would need to come back if we talked about GBP 20 million going to GBP 60 million as an example?
Okay. So in terms of people cost of sales, I mean, as a long-run average, it's about 40%. On the upswing, it'll drop to 39%-38%. Okay? And we sit on additions, so we don't let the additions we wait till things squeak before we put people in, to be honest with you. And the upswing is not just going to come from oil and gas by any means. We're seeing it right across the piece. So I think you're kind of asking, "Well, what's the drop-through that you should model in there?" If it's not over 60%, I would be very, very, very disappointed, actually. So it should be much higher than that. In the near term, when we see an upswing over a couple of three-month period, we should be 70-odd%, 80% indeed. So they're big numbers, and they can really do good things.
Now, clearly, over an 18-month, two-year period, you don't get that kind of drop-through, but in the near term, you do.
Can I just ask on the specialist technologies? Obviously, 8% growth outside of the very specific headwinds in oil and gas. Can you just give us an idea of how, if at all, the kind of competitive dynamic is changing? I appreciate the specialist technologies themselves are proprietary, but I mean, people must be looking at those technologies and thinking, "Can we do something similar?
Good question. So I'll do a couple of things on that if you don't mind, Andy. The first one is some of the technologies. There already is competition. So if we take, for example, Corr-I-Dur and low-pressure carburizing, they are established. There are competitors out there. In fact, in low-pressure carburizing, though, we are miles ahead of anybody else in the third-party market. The only people that come close are in-house operations. So we're very, very well established. And the big problem with LPC is it's difficult to get it right in the first place. You need a lot of experience, and there's a big capital barrier to get into that business, which is why we don't see the small players trying to go into it. I mean, it costs a lot of money to get into it.
And we have a very good position there because outside of the primes, we're pretty much the only place in town to go to. The others, other than LPC and Corr-I-Dur, there's surface technology, which clearly does have competition in. We're by no means the largest player in that by any means. The other ones, it's much rarer, but we are starting to see some competition. So in especially stainless steel, there are some new startups coming into the market. They haven't got any traction as yet. So that's something that will develop over the years to come. And when you've got the kind of margins that we've got, you will see competition coming in, no doubt.
I think the place to watch is probably our HIP product fabrication, which we have a brand name in that which we've had for quite a while called Powdermet, which we're now pushing ahead with. Powdermet actually is not just the HIP powder business. It also incorporates our 3D printing activities. And there, we've got some very, very nice things coming through, and there'll be a big publicity splash on it pretty shortly, actually. What we've managed to do is with a combination of our HIP powder business and the 3D printing is to produce much larger 3D-printed items, number one, than we're capable of before. But number two, most importantly, we've taken the lead time, the production time out of the 3D printing process quite significantly. So you can now produce using that technology much faster.
When you think about the number of printers that people are buying to try and get their production rates up because it's a very slow process, it's got a tremendous impact on it. So we're not trying to play head-to-head on 3D printing. We've actually got a different angle, and using our HIP technology is just a great thing, and I think we'll see great things to come on that.
Maybe just kind of, I guess, a follow-up to sort of finish off on that. Is there a risk, I guess, of individuals within those businesses that do the specialist technologies? I mean, what's to stop kind of one of these guys wandering off with kind of all the secrets? I appreciate it's not as simple as that maybe, but.
No, no. That's sort of one of my keep-me-awake-at-night questions, that is, because it's true. So what we do is we partition knowledge. And in fact, we use suppliers, and we never give suppliers all of the story. They all have different drawing sets with only part of it. Indeed, some of our drawings have got things on them which actually aren't required in there just to catch anybody who tries to copy it. And then within the business, there are very few people that have all of the keys to the kingdom. Very, very few. They're quite limited. And those people that do have the keys to the kingdom have signed up some pretty onerous confidentiality agreements. Very onerous. So we've done the best we can to actually do that, but you can always get a bit of leakage.
Then maybe just one more sort of a hurried approach to questions. One for Dominique. Just on the central costs, if it was GBP 14.5 million, I think, this year, can you just give us an idea of kind of a number for that just for our models for this year?
Well, that GBP 14.5 million also includes the BIP costs, and that can be quite variable. But if we're talking about underlying this pure central costs element, then this year, that will probably be somewhere between stable and up GBP 1 million on last year.
We've got to pay for the new CFO, you said, right? Very expensive.
Thanks, guys.
Hi. Wasi Rizvi from RBC. I was interested that you mentioned those German sites you bought were operating a higher margin than yours, given that you're the big player in Europe. What is it that they're doing? Is it just customer mix? Are they sweating their assets more? And what does that mean for?
Actually, the opposite from sweating the assets. They were very, very overinvested or heavily invested, is a better way of putting it. It's an extremely nice kit, very well invested. Even if you see them, they've got more new equipment in them than you'd see in any normal facility, ours or anybody's. That's a big key to it, actually.
Would that encourage you to maybe try and do the same in more facilities?
No, because the return on investment for buying those assets would be pretty low, all right? So it's one of the reasons we bought the business, and we didn't actually have to worry about the fact those assets were so new.
Great. Thanks.
Morning. It's Robert from Morgan Stanley. Two questions. One is around autos, and I guess just big picture, sort of the thematic trend towards electric vehicles, how you kind of think about that in terms of heat treatment and metal content within the engine and the drivetrain, and where do you think that's going to go to in the next sort of two to three years, and how you're going to maybe adapt your business model over that period to move from one to the other. And then the second one was really trying to flesh out a little more into the general industrial trends. I saw that sort of half-on-half pickup. Maybe if you could give us some. I mean, obviously, there's a lot of different moving parts in there.
I thought you had sort of reasonably heavy industry CapEx weighted in there, so I just kind of wanted to know what was sort of moving that number up half-on-half. Thanks.
Sure. The auto question has got a nice one in the respect that we love hybrid vehicles. So I mean, a lot of the heat treatment is in the engine and the drivetrain. In a hybrid, you get twice. You get two. So there's far more work for us in a hybrid than there is in a normal petroleum-powered, gasoline-powered vehicle. Electric, don't like them because they don't have much heat treatment in them. So I don't know what we're going to do about that, but if they ever go all electric, it's a little bit of a problem. But certainly, hybrids are great for business. Absolutely great. As far as the GI, I can't put a huge amount of color on it for you because it is very widespread, and the pickup was very much across the piece.
The only thing I can say is agriculture's not formed part of the pickup. Okay? But then the other thing, with agriculture, it tends to be seasonal, and we haven't hit the season yet. But so far, it's been everything but agriculture. And agriculture right now is quite a small part of our business anyway. I will say this, that the GI pickup is more in Europe than it is in the United States. And I think that makes sense, actually, given the strength of the U.S. dollar and the export markets from Europe.
I'm Mark Fielding from UBS. In terms of the deep-sea oil and gas side of things, from my memory, was HIP product fabrication. Is that correct? Yeah. You suggested before that actually you could have been using that capacity for other things to a degree if you hadn't had such strong demand from that industry. Is that something you're still moving towards in terms of getting growth back there, or is it a sort of wait-for-recovery phase?
Yeah. No, no. It's absolutely right, Mark. So the subsea oil and gas market's been very subdued. It made a liar out of me because I thought it would not be given the amount of money that had already been invested in it, but they did. It's very subdued. It hasn't come back yet. And what we did as a result of that was turn our attention to other areas. So when I was referring previously to Powdermet, that's come out exactly out of that situation. So we started looking very heavily in how we could use our HIP powder technology in conjunction with other technologies, in particular 3D printing. And that's where that's come from. So we're seeing a lot of headway, particularly in the aerospace market, for example, with that technology.
There should be some very good things coming out of that, and that is a direct result of the subdued nature of the subsea business. There's also some 3D printing work in conjunction with HIP powder that's going into oil and gas, believe it or not, because one of the things that's happened with the decline in the oil prices is it's caused the field services guys out there, the oil field services guys, to look at their costs very strongly, as you can imagine. And so we've been able to produce some much more cost-efficient products using that technology than they could in the past. And so we expect that to start ramping up quite nicely. Even without any change in background demand, there's a steady state flow of that stuff, and it's converting over to this newer technology, which is very, very cost-effective.
If I can just follow up on that because therefore is your sort of utilization level. Is it still pretty full in HIP? Because I noticed that on your chart, you had another plant coming on stream for that business as well, and what the timeline is on that.
So the utilization issue in HIP is HIP services, where we've got a lot of capacity. HIP is really a people business, more than anything else, and where we have capacity to do a lot more. We did not actually take down our core technologists in the specialist areas where they're hit by the oil and gas side. So we did take out some sort of lower-skilled labor, but we kept on our core technologists. So we've got a lot of headroom in terms of going forward in that. And what you see on the map is a center of excellence, which is due for the Midwest, because most of our HIP technology is based in Europe at the moment. We've got some on the East Coast, but we're putting in a center of excellence in the Midwest.
Thank you.
Okay. That looks like we're done. Thank you.