Ladies and gentlemen, thank you for joining the Bodycote Trading Update. For the first part of the conference, all participants will be on listen-only mode, and afterwards there'll be a question-and-answer session. Just to remind you, the call is being recorded. And now, pleased to present our hosts, Stephen Harris, Chief Executive, and David Landless, Group Finance Director. Mr. Harris, please begin.
Thank you very much. Good morning, everybody. Stephen here. We have obviously put out our RNS statement this morning. It's fairly straightforward. I would hope you would think that there were no surprises in it. A couple of points I'd like to touch on before we throw open for Q&A. The first one is I just wanna put a little bit of color on acquisitions here. So those of you that have been following us will know that we have a strategy which internally we use the oxymoron of organic acquisitions. It's effectively the acquisitions of very small businesses using our annual cash flows. The state of the market in the sector that we move in, in classical heat treatment—this is a classical heat treatment strategy—is that we tend to be the only buyer.
If normally, maybe there might be somebody else, but we don't pay premium for these businesses. They're privately owned. And so for us, the strategy is to be able to deploy effectively capital, operating cash flow, either into capital investment or into these small businesses, and they look very much the same. And so what we do is we buy small businesses. Our strategy is to buy small businesses, and by the time we've integrated them, which is very, very quickly, they are running at our normal performance levels. So that's our strategy. We've been making noises, as you will remember, that we're following this strategy. I'm very pleased to announce that actually we can announce some action here. I'm not trying to claim this is big beer. The strategy is not about big beer. It's about adding small businesses.
The number of sites which we acquired in this period—three, so far—they were in North America and Germany. We would expect them to be exactly in line with the strategy that we've outlined previously. So, you know, if you want us to ask how much we paid for them, sorry, we're not disclosing it, but it is exactly in line with the strategy, and our strategy is not to pay premium for these businesses. Just to sort of rub the point in, we won't have these integrated until the end of the year, so the impact this year from these acquisitions is a rounding error, to say the least. That's the main point I wanted to make because it's not sort of fully explained in here.
Before we throw it open for questions and answers, I'd just like David to take over and just give you a little bit of information on some points, for example, on currency.
Yeah. So, clearly, currency movements have been very substantial in the last six months, but I think it's worth bearing in mind that most of the move on dollars and euros, which are the most important currencies for Bodycote, had already taken place by the time of our interim announcement. Now, since then, of course, sterling has weakened somewhat more, and on average, we're looking at a four-cent weakness in the dollar and three cents in the euro.
Together, combined, that's worth about between GBP 1 million and GBP 1.5 million of additional profit for us in H2 compared to what we were thinking at the time of the half-year results at the end of July. Just to reiterate that the tax rate for this year is in line with what we said at the half-year as well, so that's 27.5%. There's no change in the expectation for finance charge this year, so around GBP 2.5-GBP 2.6 million.
Thank you, David. With that, we'll throw it open for questions if we could, please.
Thank you. And ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name's been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from Andre Kukhnin of Credit Suisse. Please go ahead. Your line is open.
Yes. Good morning, Stephen. Good morning, David. Thanks so much for taking my questions. I'll go one at a time. Firstly, on the acquisitions, could you comment on the margin of these businesses, of these sites? Are they comparable to Bodycote average or not? And what kind of work are they if just thinking about allocating them into the divisions and within that? And I guess within that, you have given the geography, so just more in terms of whether it's AD or AGI.
Finally, on acquisitions, is this potentially the beginning of a trend, or is it just something that you've had in the pipeline and, as usual, subject to timing of these, of these things they've materialized, or has there actually been a change in kind of vendors' expectations or vendors' attitudes that have led to these deals and we may be thinking about more coming through? I've got a couple of quick follow-ups as well, please. Thank you.
Okay. Morning, Andre. So I'll take those, if you don't mind. In terms of the margins of these businesses, what I'm gonna do is to tell you exactly what I just told you. We outlined a strategy that said that we would buy businesses and they would be at our performance level. Our acquisitions, in this case, are exactly in line with the strategy. There's no new information in, in these things. They're not different. Going forward, these things we expect to be completely in line with the strategy. That's point number one.
Got it.
Point number two, they're in classical heat treatment, and they're actually AGI. Okay?
Yep.
Well, I shouldn't say in the U.S.. The North American one, which is actually in Canada.
Uh-huh.
All right, is automotive, but it serves the North American market. The ones in Europe are in Germany, and they serve a wider automotive and general industrial market. The ones in Germany actually provide us with, you will recall we have a micromarket strategy where we actually like to bridge between our existing sites and to actually have multiple sites in a specific location. The two different sites that we've picked up in Germany are part of that micromarket strategy. Okay?
Yep.
As far as a trend is concerned, we told you that we were following a strategy of what we call organic acquisitions, which I hope is funny for some people. This is not a one-off. This is part of a trend. We are pursuing this strategy. We've been telling you that we've been working on it. There are no changes in the vendors' expectations. These are privately owned companies. They don't actually care what's happening in the world. Maybe they care about the new U.S. president. I don't know. But they don't care normally about what's happening in the world. They care about how much money they've invested in the business, where they are in their life cycle, where their kids are, and where their grandchildren are. Nothing changes depending on what the economic market is.
So there are these expectations have not changed, and we are working extensively across the world with these, work with these private owners. And we've been doing it now for nearly 18 months, two years. These things just take a long time to cook. You're now seeing the results of the cooking, and I expect to keep the strategy going until something different happens. So that's the trend question. Whilst I'm at it, I'd just like to forestall a question that somebody might ask is, "So if you're spending all your money on these acquisitions, are we gonna have a special dividend at the end of the year?" I hope you would imagine that as we are paying premium for these businesses, when you do the math, you can work out it is irrelevant to our year-end cash position.
Now, we will make the decision about a special dividend when we get to that point in the year. And you know our strategy is to look at what we've got in the bank at the end of the year and sweep. And if we've got cash at the end of the year or sufficiently small debt, we will be looking at a special dividend. If we're more successful on more acquisitions, of which we can't predict, then maybe we won't. But we don't know at this point in time. At this level, I can't imagine that we would have a problem unless there's something else that we can see use for the cash. It's all in line with strategy. No surprises. Is that good enough, André?
Yeah. That's, that's very clear. Thank you. And, and just a quick follow-up on these sites. In terms of the processes that they utilize, are they in line with Bodycote's kind of batch strategy, or do they need to be changed from, from continuous? And kind of broader than that, do they need extra investment, or are they well-invested sites?
So they are completely in line with strategy. We've not gone off-piste. We're not those kind of people. Do they need extra investment? Not per se in what they are. They need some changes in business practices. And I mean from the standpoint they've been operating as family companies. They do not have the tools that Bodycote's got. They don't have the value-add capability that Bodycote's got. So we will, in fact, be—can I use the term—bodycoating them? Will they require future investment? Of course. We're expanding, and we will deploy capital as and when we can see the use for it. We wouldn't have bought these businesses—they're very, very small—if we thought that they were in a hinterland that had no future. But it's not that they need to have capital to get them fixed.
It's the fact they'll be part of our future growth strategy. So, I wouldn't expect anything more than a rounding error, in terms of capital for what we've just bought.
Very clear. Thank you. My second kind of question or other question was just on the implementation of Bodycote pricing model. I know it's not something that we can really get sort of tangible quarterly updates on, but if there is anything new versus July or kind of if there's anything to say on how it's progressed on maybe year-to-date basis, that would be great. And I guess the German acquisitions, as you said, the m icromarket strategy, that's I guess very supportive to implementation of that model.
Yeah. I think you answered your own question, André.
Right. And outside of the deals, I mean, generally, as maybe the world's become deflationary for a little while now, are you running into difficulties in relation to the pricing model?
In relation to the pricing model?
Yeah. Broader at the group level.
I think you answered your own question. We can't tell you at the quarter.
Fair enough. That's it from me. Thank you very much.
Appreciate it, Andre. Thanks.
Thanks.
Thank you. Our next question comes from Mark Davies Jones of Stifel. Please go ahead, sir. You're on the line in Derby.
Thank you very much. Good morning, gents. Can I just ask a couple of end-market questions? The commentary around the car and light truck market is relatively positive, really, the U.S., but some very mixed market news out there. So that presumably is much more about what you're doing specifically. But could you just talk about how you're seeing the outlook in that business in the States? And then, at the half-year, you were quite optimistic about the aerospace side in Europe, and that clearly is seeing signs of coming through in Q3. Is that a trend that you see ongoing through the balance of the year?
Yeah. So automotive, Mark, is, you know, the underlying demand in automotive has remained solid as far as we can see. And we've got new investments, particularly in North America, but some in Europe as well, that are helping to drive further growth in this business for Bodycote. And we anticipate in the, you know, during next year that we will continue to get growth from the new offerings that we have both in Europe and in North America. So, I mean, clearly, the background production rate of cars will be relevant to Bodycote, but whatever that is, we would expect to be doing better than that background because of the new programs that we're working on, which particularly relate to fuel-efficient new transmissions. Let me just add a little bit more color on that from a general standpoint.
The auto industry, as you know, is based in Michigan.
Mm-hmm.
They have a new U.S. president that actually has made all kinds of statements. The biggest supply chain into North America is from Mexico by a mile.
Yep.
It's accelerating like crazy. What we don't know, and I'm sure nobody else knows at this point, is what's gonna happen in Michigan because of the new regime. Our problem, if anything, is we know what we're doing. We have no idea what the impact is going to be of the new regime. I think everybody's got the same problem. We never try and predict the future, because we don't have any data on it. But I just would like to point out the uncertainty in North America. Believe me, we can see the uncertainty 'cause we talk to our major OEMs,
Sure.
Which are all the big guys. They have no idea. What we're scared of is that they will make a knee-jerk reaction just to preserve their situation 'cause they don't know what's going on. So that's my sort of rock in the pond about uncertainty. It's not about Bodycote. That's about North American automotive.
Sure. That's a challenge for all of us, I think.
Yeah. Hope you didn't vote for it. Anyway, carry on. The next point was aero.
Yep.
I'll take that one if I can. So this is exactly what we said at the half-year. There is no change. And the situation is that in the U.K., aero is strong. And that aero U.K. is a supply chain that all ends up at the same place, and it is strong. And it's strong because we are very close to the prime, and we supply right up the supply chain. Now, whatever you get from the prime supplier, whatever you can get that as much as I can. What I'm telling you is that our business is strong, and it's growing. It's not necessarily related to the number of planes that are flying. What we are doing is providing stuff that actually goes into the pipeline. And so inventory movements, plane build rates, catch-up rates, decline rates, all of that gets into ours, plus flying hours.
'Cause don't forget, what we're doing is not just new equipment. It's aftermarket.
Mm-hmm.
So what happens at the prime affects us. Right now, we are at the gills. Okay?
Okay.
France, repeating exactly what I said at the half-year, is strong. We have a massive position in France in aero, and we work very, very closely there with the primes. That is actually the CFM Alliance, Snecma with GE.
Mm-hmm.
And when you look to France, it's nothing to do with Airbus per se. It's to do with the engine builders, although we do have a small piece of work for Airbus, which is quite unique. But the main business is with the Safran Group. Okay? Not just Snecma, the Safran Group. We are whatever happens to the Safran Group, doesn't actually reflect on us. The problem is, is that we are their supply chain. I say the problem. The beauty of it is that we're their supply chain. And we're very trusted by them. And so we are growing with them. And as I think if you watch what the punters say about Safran Group, they're actually doing quite well in this world right now.
Yeah.
If we go to North America, repeating exactly what I said at the half-year, the North American market is in a slightly different situation. The issue there is that there is a uncertainty in the supply chain, which is much, much bigger than either U.K. or France. Right? I mean, there's many, many more players in North America. All roads lead to GE. GE have run a strategy over the last few years of deliberately building a supply chain that's bigger than they needed because they were doing risk management.
Mm-hmm.
What they're in the process of doing is reducing their supply chain needs. That means that there are winners and losers. So if we're supplying a winner now, we supply across the whole marketplace, but we don't supply everybody everywhere. But we do supply most of them because some of them do it in-house, you see. Okay?
Yep.
But if we're supplying a winner, then we're doing very well. If we're supplying a loser, we just lost the business. It's not us. It's our customers. In fact, we're in a period of transition in civil aerospace in North America. I think if you look at the commentary on aerospace from all around the world, the people will be telling you that the U.S. is in a kind of difficult position. We're in a good place. Our problem is we need the supply chain to self-sort itself out. Once it does, then we're in good shape. Basically, North America for us is slightly weaker. It's, I think it's flat, isn't it, gents? We're flat in North America. There's nothing new in what I've just said. This is exactly what I said at the half-year. All right?
That's great.
I'll add something more.
Okay.
Defense, which is a slightly smaller, a lot smaller part of our business, is starting to show green shoots. The trouble is for us, defense is very, very small. Now, who knows what's gonna happen in a brand new world with an American president? Okay? I hope that answers your question.
Yeah. That's very good, color. Thank you very much.
Thank you.
Thank you. Our next question comes from David Larkam of Numis Securities. Please go ahead. Your line is open.
First one, please, David. Just on your guidance, no change. Presumably, you know, if we're adding another GBP 1 million-GBP 1.5 million on currencies, is that mean the underlying is a little bit softer?
Yes.
Or is that okay?
and that is particularly the continuing weakness as we've described very clearly in oil and gas. So back at the half-year, we assumed the rate of decline in oil and gas would have slowed down, and it has not yet. Now, it stabilized now, but it came down more than we thought it was gonna do when we spoke in July.
Okay. And do you need to take any more action in those sort of Houston area or with these oil and gas plants? Are they still profitable?
The answer is no. We don't need to take any more action. We've only got circa GBP 20 million of run rate. We're managing it.
Okay. And then just, on the sequential numbers, you say it's getting it's. I just wonder what that looks like. I mean, your 3% organic is against a bit of an easier number. So, how does it look like sequentially? Are we sort of now roughly flatlining?
Well, that's what we think we're looking at after the last couple of months, David, that oil and gas has now reached a flat line. I'm not really prepared to predict where it's going because we don't really know. But what we have seen is a stabilization at this new low level, which is, you know, we were at 10% of group sales, GBP 60 million of them. We're now down at 20%. So that gives you the order of magnitude of the decline that we've seen over the last couple of years.
I was actually thinking more at the group level, that, you know, we started to see markets down. So 4% the second half of last year, 3% now versus the first half sort of down 6%. So I wonder, you know, the first quarter or Q3 versus the first half group-wise, are we sort of bumping along the bottom now?
Well, that's a bit difficult to be sure of, David. I mean, we were down, what, 8% year-on-year H1. We're down 3%-ish in the last four months. So for the year as a whole, we're down 6%. So clearly, the rate of decline is diminishing. Has it reached zero yet? Don't know.
I'll just jump in there. The AGI trend is a long-term trend. We talked about it ad nauseam. There is no movement in it. It's exactly the same it has been every quarter for the last two years.
Okay. In other words, it's still dropping a bit.
Yeah.
Still dropping a couple of %. That's just a reflection of, you know, industrial production around the world, basically.
Yeah.
So that's our headwind that we're continually fighting.
Okay. Thanks.
Thank you. Our next question comes from Robert Davies of Morgan Stanley. Please go ahead. So your line is open.
Hey, yes. Morning both. Just a couple of quick questions for me on oil and gas. Maybe just give us an update on the outlook for the subsea projects. I remember you mentioned before there's obviously some uncertainty around timing of these things. Just kind of, what's the latest comments you're hearing from your customers? And then just the other one was around the oil and gas business in U.S. land. How do you think about the sort of inventory levels there right now? What are customers telling you in terms of potential outlook? I'm just thinking about if we are at the bottom, what kind of potential is there for pickup in inventory sort of through a restocking on top of underlying demand? Thanks.
If you don't mind me being very blunt, I'll tell you exactly what's going on.
Mm-hmm.
This business is controlled essentially globally out of Houston.
Yep.
Even if they're European companies. The Houston sort of nexus that controls this stuff. Yes, there are some European players, but the actual whole project world in subsea is controlled out of Houston. The four-letter expletives about the new presidential regime are immense. Nobody has got a clue.
Mm-hmm.
So trends, inventories, doesn't make any difference. What we don't know is what's gonna happen. What I can tell you is the engineering side and the purchasing side are still looking at project releases. Senior management are sitting there going, "What the hell's gonna happen?" So nobody's got a clue. And until we see what's what the rhetoric that came out of the campaign turns into in your money, I don't think anybody's gonna know. I mean, it's a global issue. Bodycote's not special. We are in a pole position, but we haven't got a clue, and our customers don't have a clue either. So we're in a tremendously uncertain period here. And it's, it's nice, actually, that Bodycote works day to day with no forward visibility. This is business as usual for us.
Mm-hmm. Okay. All right. Great. Thanks a lot.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now. Any further questions, please dial zero one. Okay. There seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.
Okay. Thank you very much. Thank you, everybody. I mean, clearly, there's a hell of a lot of detail that we can provide, but it's gonna take some time to know what's gonna happen. If you have further questions, please do call in, and we'll try and answer them. But I don't think we wanna spend three hours in a conference call answering tiny little questions because the overall picture here is no change. Thank you very much.
This now concludes the call. Thank you all very much for attending. You may now disconnect.