Well, good morning, ladies and gentlemen. Welcome to the Bodycote interim presentation. I'm Stephen Harris, Chief Executive. On my right here is David Landless , our Group Finance Director, of course. We're going to go through this presentation this morning. I'll start off now with a summary. David will then pick up with the financial review, then I'll come back to do a bit of a business review and talk about the outlook. Moving steadily ahead on this busy day for you all. Revenue. Like for like, we've had a revenue decline of 6%. So what does that mean, like for like? What we're doing here is constant currency, and we're adjusting for the restructuring program of closed sites, and also, of course, our sale of our Brazilian business, which is the biggest piece on that like-for-like side.
So like for like, 6% down. If we take energy out of the number, then in fact, the group is 2% down. So energy itself was 34% down, so quite a big impact there. In headline operating margin terms, we've actually had the operating margin fall slightly to nearly 17%, 16.9, down from 18%. Just to point there, if we take the energy side out of that, the rest of the group margins were actually maintained. Then moving on to business development, we said a couple of years ago that the environment looked like it would get kind of slow from a growth perspective, and then what we would do was increase our investment rate to help generate organic growth, and we've continued to do that.
In fact, our rate of capital investment is slightly higher. I'm pleased to tell you that Specialist Technologies is now 41% of group profits. Of course, that's something that we've been talking about for 6 years now. And they are moving ahead as we have been doing it. Emerging market revenue is pleasingly up 14%. Balance sheet, we finished the half at net debt of just over GBP 5 million. And finally, on the summary, interim dividend, we're going to put it up by 4.2% to 5 pence. With that, I'd like to hand over to David.
Okay, thank you, Stephen, and good morning, ladies and gentlemen. So, as ever, I'll go through the financials in a little bit of detail before handing back to Stephen to talk more about the business specifics. So here's a summary of the interim results. On a fully reported basis, the revenues are down 3%. Of course, we've had some big movements within that, and if we include last year's sales for Brazil and other parts of restructuring, the constant currency numbers are down 8%, so a couple of percentage points more than on a like-for-like basis. And the currency benefit in this first half is about 5%. Of course, sterling was weakening before the referendum, and as everybody knows, has weakened a bit more since then.
The margin performance has been resilient in the face of this weakness in demand. And just to repeat what Stephen said, ex the oil and gas business, the margins have been maintained, but overall, we're now at 16.9%. There's no further restructuring, and the restructuring that we announced this time last year is essentially completed, and we don't have any further restructuring on our agenda at the moment. The tax rate, as we indicated last year, has been under a bit of pressure, is now 27.5%, and I'll talk a little bit more about tax and a number of these other factors in more detail in a few minutes.
Essentially no debt in the group, GBP 5.5 million only, and headline EPS at 18.3 pence, and the dividend, interim dividend, up 4%, at 5 pence per share. So now if we look as usual at the individual business areas. So first of all, looking at Aerospace, Defence and Energy, ADE for short, we can see here quite clearly where the impact of oil and gas is falling. So our oil and gas business on its own are down 48% year-on-year. It now represents less than 5% of group sales, and before the downturn started, it was just on 10% of group sales. So it's come off a long way. And overall, that means our constant currency revenues in the ADE business were down 10%.
As with the group as a whole, the currency benefit is notable. It's a 5% increment, favorable in this part of the business, GBP 6.5 million. And here we see overall that the margin in ADE has fallen by 200 basis points, but it's still at 22.5%. And outside of the reduction caused by oil and gas, which is concentrated largely in about 15 facilities of the group, the margins have been maintained in the mid-20s%. And remember, our objective is not to increase margins in ADE. We're looking more in the general, in the round for revenue growth in this part of the business. So margin and maintenance is the objective.
Of course, we've not achieved that in oil and gas, but our energy business is still profitable. We're not a loss-making business, even now at these levels of sales, and it remains in the high single digits. So that's a summary for the ADE business. If we move on now to AGI. So I think we are very pleased indeed that despite the challenging market conditions, to show margins up once again, this has happened half on half year-on-year now for quite a number of years. It's now at 16.5%. If we turn the clock back four, five, six years, it was down around 10%, still going up, despite the pressure on sales.
As we can see, the constant currency revenue decline is 6%, but the drop-through on profits is very good at only GBP 1.5 million effect. This has, of course, been aided by exiting Brazil, and we sold that business. In the end, we didn't close it, but selling that business has helped. And most notably, too, the continuing benefits of applying the Bodycote margin model to aid in improving the mix of offering that the group has. And we're not at the end of that runway, so 16.5% is not the end of the margin progression in the AGI business, and this is the area where we are focusing on getting those margins up. So now looking at a year-on-year bridge of operating profit.
First of all, again, we're pleased to be able to show that our pricing power is respectable, and notwithstanding the demand pressures out there, our average selling price went up close to 1% in the first half of the year. That GBP 0.8 million green bar at the left-hand side of the chart is net of input costs. So labor, of course, is far and away Bodycote's largest input cost, represents around 40% of sales, and that's moving along as usual, in line approximately with CPI inflation. We have had some benefit from energy cost reductions, and overall utilities year-over-year are down about 4% in cost terms. Of course, the biggest effect on this chart, unsurprisingly, is the sales volume, which has cost us over GBP 7 million in operating profit terms.
But the operational gearing, the drop-through, is respectable at about 30%, and that's certainly better than it would have been years ago in this group. You might wonder why I'm showing a bar with nothing on it. That, of course, doesn't mean we're spending nothing on startups. It just means that we're spending about the same rate of money as a year ago. So we haven't stopped our greenfield investments and our expansion of our Specialist Technologies. And in this year, as in last year, first half, the spend's about GBP 2 million. And then other costs, share-based payments, central costs just nudged up a bit. Of course, the share-based payments take a three-year view, and hopefully, we will come out of this more challenging set of conditions over that period of time.
And then, of course, at the end, we can see again the GBP 3.4 million effect of the FX. So cash flow. Seems to me, as FD, that profit's all fine and dandy, but I prefer cash. And notwithstanding the small drop in the profit line, the free cash flow in the group is GBP 21 million, the same as last year. We're continuing to invest in the group strategy, so we've not done that by cutting back on CapEx. Quite the reverse, actually. So CapEx spend in this first half, GBP 31 million compared to GBP 29, 29 million pounds last year. But we have had a decent performance on working capital. Now, it is an outflow.
It's always an outflow in the first half, and that's because sales in May and June are always higher than November and December because of the effect of our customers' holidays on our run rate. So H1 always sees some cash outflow on the accounts receivable, but we have had a better performance this year than last year on working capital overall. Restructuring, similar to last year, the spend was just around GBP 4 million, and we expect a similar cost of that restructuring that we announced last year in H2. That's now focused principally on the ongoing environmental remediation. So GBP 21 million of free cash flow in the first half.
Now, given the large movements in FX, I thought it would be a good idea to try to clarify for you what our currency exposures are in the group. Now, remember, we're not talking about transaction here because we do operate locally. Stephen will touch a bit more on that in the context of Brexit later on. So this is all transaction, is what we're talking about.
Translation.
I'm sorry, all translation is what we're talking about. Thank you. Both begin with T. So this translation, in fact, what is it? You can see that broadly speaking, we have a similar amount in both sales and profit terms of euros and dollars. And then we have a plethora of other currencies, whether we're talking about Swedish crowns, Danish crowns, zlotys, Turkish lira, renminbi, you name it, we've got it, Mexican pesos are in that blue piece. Now, you might conclude, rightly probably, that the profitability in the blue piece is a bit lower, but that's those development costs that we just talked about, that GBP 2 million coming through, and without that, they'd be a similar level to the rest of the group. So our emerging markets business is not less profitable now we've exited Brazil than anywhere else in the group.
But also worthy of careful attention here is the fact that in profit terms, GBP is a negative number. We started off trying to do this as a pie chart, but it didn't really work very well. So, and the reason for that, of course, is that we have about GBP 11 million a year of central cost that's denominated in GDP, GBP, not GDP, in, in pound sterling, and that's why that number goes negative. It is not because the UK trading business is less profitable than the rest. Indeed, that's, that's absolutely not the case. But you need to just make sure you've got that right in when modeling the group's numbers.
And just to repeat, numbers that I've given you before, for every 1 cent movement in EUR, it's worth about GBP 350,000 of operating profit, and every 1 cent movement in the USD is worth about GBP 300,000 of operating profit per annum. So hopefully that's enough on that subject for you. Just want to mention a couple of other financially important areas, tax. So we've already talked about the tax rate at 27.5%, and to remind you why it is nudging up. We did have a notable benefit from historical tax losses, but we've largely accounted for those now under the accounting rules, and so that protection, if you will, of the underlying rate is now largely exhausted.
And of course, we continue to get a higher proportion of our profits in those countries that think high corporation tax rates are a good idea, namely the United States, France, and Germany. So there is still some upward pressure on this tax rate, and it's likely to nudge up another, one percentage point, over the next year or two. I also just wanted to talk a moment about the finance charge, because although we essentially have no debt, that does not mean that we have no finance charge. So we have no interest charge, which you can see on this chart, but we do have other elements of finance charge, and they are amortization of facility fees and other bank charges is the most, notable part of this, running at about GBP 2 million per annum.
Then we have a small, but nevertheless, it's an item as well, the pension charge relating to financing. So we're always going to be, even at zero debt, we're going to be running at GBP 2 million-GBP 2.5 million of a finance charge. Now, I just remind everybody what the five-year perspective looks like. So the margin performance, I think you can see over this five-year period, has been pretty resilient, actually, even under this year's challenging conditions. And of course, as I've already said, people cost is the most important factor in the group's cost base. And you can see here that we've now got about 300 fewer people than we did last year, which is very important. But we still have more than 700 temporary and short-term contract workers in the network, which is actually higher than at year-end.
We now have more temps than we did six months ago, and that represents about 14% of the workforce. That gives us more flexibility going forward to control cost, and that obviously continues to be very important to us. With that, I'll hand back to Stephen.
Thank you, David. Okay, let's take a look at the business review. I'll just go through the main sectors of the business. So starting with Aerospace and Defence , revenue GBP 74 million, this part of the business. So constant currency, decline here of 0.6%. Now peeling back the numbers and looking within that, UK Aerospace is actually up 1% in the first half, and going forward into the second half, this business is growing quite strongly. So this is coming off a base where we've seen declines in the last few years, and we're now actually looking into quite a rosy picture going forward. So we'll see a bit of strength here in the UK, finally, which is good. North America, not too bad.
Unfortunately, we do have a business jet business, which is very contained into the middle of the country. And there we saw a large decline. And just to explain that slightly, that business is about a design change, structural design change in the business jets that actually has reduced the number of components that require heat treatment and other services that we provide. So that's a business that's actually gone away, and it won't come back because that's a one-time design change. And of course, in France, once again, year-on-year, this business grows very, very nicely. We've got continued strong growth in France and more to come. Looking at the energy piece then. So energy in total, constant currency decline of 34%. Revenue is now in energy only GBP 26 million.
The point that David made is that, the energy business, despite this, this strong hit, that we've had, over the last couple of years, is still achieving high single-digit margins, which is quite pleasing. And I think, you know, we've actually got the costs here well under control. The decline in oil and gas from a sequential standpoint, seems to be stabilizing. We don't normally talk about quarters in our business, mainly because there's a bit of seasonality, and so trying to explain things quarterly gets quite difficult unless the movements are large. And in the oil and gas business, the movements have been very large, so I think it's a pretty safe, bet to be able to talk about that, in oil and gas.
And where what we've seen is a sequential decline quarter on quarter on quarter since, you know, since 2014, really. That now appears to be abating. There are a couple of signs there. I mean. Our business in onshore oil and gas is about a three-month lag from the rig count. And what we've seen in very recent times is a stabilization in the rig count, I mean, in marginal terms, even a slight uptick. But that's not necessarily the major reason for any optimism here for me. Question, optimism in terms of this being bottoming out. What I'm really looking to is the subsea portion, where we've seen projects pushed to the right all the time, but we're now seeing our customers announcing growing order books into 2017, and in turn, that will flow to us.
So that's, that's one of the reasons for some optimism that perhaps the oil and gas piece has bottomed. The other, energy part for our business, of course, is industrial gas turbines and nuclear, and that's been ostensibly flat. Looking at automotive, we've got, like-for-like growth here of 0.3%. Cars and light trucks up 3%. The, the anchor on this part of the business is, heavy trucks, which I don't think anybody will be surprised about. Heavy trucks have been taking a hammering all around the place, and it's down 15% for us. In this area, in automotive, Specialist Technologies has had a big impact, a strong growth from the Specialist Technologies side. And actually, it's not on the slide, but emerging markets, we've got good automotive growth, particularly in places like Mexico and China.
Then, if we look at general industrial, this is the largest part of the group, about 38% of the half, GBP 109 million, down 5%. This is a continuation of a trend that's been going on for over two years, two, three quarters almost. This part of the business is the most closely linked in our business to any particular macroeconomic issues, and basically, it tracks industrial production, particularly industrial machinery, capital equipment. And the stats that you follow, as well as I do, probably, have shown weakness in this area for some time, and it keeps going. So we don't see any real trend. It's a slow, steady march down, and we've seen it again in the first half, so that's down 5%. Just talking about the...
A different way of looking at the business. We've talked about Specialist Technologies versus Classical Heat Treatment now for a little while. Quite pleased. I mean, we flagged Specialist Technologies, as I said earlier, as something that we would really put some effort into about six years ago now, and that we would start investing in it. And we wouldn't tell you at the time how much it was worth, 'cause it wasn't worth very much back then, and we didn't want to get anybody too excited. Well, in the fullness of time, actually, now, this is contributing quite a lot to the business.
Once again, the proportion of group profits attributable to the Specialist Technologies has gone up, so that it's now 41%, and that's notwithstanding the fact that two of them, which is HIP Product Fabrication and Surface Technology, have had quite a large portion in oil and gas. So notwithstanding the oil and gas impact on the Specialist Technology businesses, we're still seeing a growing contribution to the group. And of course, this is a story that we expect to keep going for quite some time now. A lot of runway in this. Quick note on Brexit. Question we get asked all the time. We've got a very boring answer for you all, I'm afraid. So cross-border trading. Bodycote essentially does not do cross-border trading. Everything we do is locally, in country, so we do not have cross-border cash flows.
Effectively, there's no cross-border sales going on. That's nil. Impact from the U.K. economy. Well, 95% of our U.K. business, which is small in itself, is actually aerospace, and I've struggled to find how that gets impacted by Brexit. So we use the word trivial here, and I've been trying to find something better than the word trivial, but I can't. It actually is not an issue for us, we don't think. And then finally, the FX translation issue, because everything, of course, is translation for us. A weaker sterling benefits us, and so here are the exchange rates that we saw last year. So you know, the current situation with sterling is actually a bit of a tailwind for us. So effectively, if anything, Brexit in the near term is certainly a positive for us.
So in summary, energy, the main negative piece here, down 34% year-on-year, of which oil and gas was 48%. And we've still managed to contain our costs there, which is, it's been quite a lot of work, but to those concerned that they did a great job. Other revenues down 2%, and we maintained the margin. Specialist Technologies, we've increased the share of group profits. In the first half, FX helped us to the tune of GBP 3.4 million, and clearly, there's more to come in the second half on that. Interim dividend, we've put up 4.2% to 5p. And lastly, I'll talk about the balance sheet very quickly. Clearly, we've got minimal leverage. It gives us a lot of flexibility.
It's a bit disappointing, at least to me, that we didn't close on any acquisitions in the first half. Obviously, we're not gonna go closing on acquisitions that don't make any sense for us, so we don't rush these things. I would be disappointed if we don't do something in the second half, though. Then, moving on to the outlook statement. It's all there in writing. I just would put one oversight on it, if you like. Essentially, foreign exchange is giving us a benefit, but I think it would be foolhardy to count on foreign exchange in its entirety. Overall, here, we're leaving our guidance for the full year unchanged. With that, we'll take any questions. Thank you.
... Morning. Michael Blogg from Investec. Just one question: Why are the head office costs, central costs going up by so much when cost control over the overall is actually pretty tight? Is it the underlying position, or are there odds and ends in that number?
Well, Michael, yeah, there are always some odds and ends in there. But the overall number for the year as a whole will be about GBP 11 million. It was, and that will be very similar. Might be GBP 10.5 million, so very similar level year-over-year. Half on half is a bit more noisy. But there are a variety of small factors that contribute to that. But year-over-year, the cost will be the same as a year ago.
Thanks.
David Larkam from Numis Securities. Just on the sort of energy oil and gas business, do you need to take more cost out of that? I mean, or are you just sitting there waiting for the markets to hopefully turn up at some point? And then on aerospace, just remind us how much of the, approximately, is UK of your, of your aerospace exposure.
So, the oil and gas side, onshore oil and gas, I would say, is pretty much at rock bottom. If we were to try and take more cost out of that, we'd be looking at consolidating sites. So no, I don't see us doing that in the near term, not from the signals that I see. The subsea oil and gas is a very flexible business. It, in itself, actually uses quite a lot of flexible labor cost there. So once again, I don't see that as an issue. If it was to go down further, then it automatically, the cost will come out. We don't have to do anything radical in terms of spending restructuring money on that. But no. So that's the answer on that, and David can pick up the aerospace point.
Yeah, so aerospace U.K. is about 20% of our aerospace business.
Hi, morning, it's Andy from Jefferies. Just a couple of questions. On acquisitions, hopefully, we'll get one in the second half. Does the move in sterling, does that kind of bugger your thought process up in buying American companies or potential? Or do you just kind of have to work a little bit harder to make the numbers work?
So, the answer to your question is no, the movement in sterling doesn't really worry me. So why is that? I mean, their earnings are denominated in dollars, and therefore, you know, if they're going to generate those dollars, it shouldn't matter. So the only question is affordability. And when we're talking about acquisitions here, I mean, let's be clear, we're talking about lots of small businesses. So we can definitely afford them. Therefore, the price shouldn't change just because sterling is a bit cheaper.
On the Bodycote margin model, can you just give us an update as to kind of how far you've got? I think from memory, last time you were kind of 35%-40%.
Not measurably further forward.
Right. Fine. Okay.
I mean, the-
Still a long way to go.
I wouldn't say cliff event, but the hill event in the Bodycote margin model will be the deployment of the ERP system, which is really just starting to get some traction now, 'cause the Bodycote margin model is built into the new ERP system, whereas up to now, it's been a quasi-manual process. So it will be far more widely spread as we get that up and running.
And lastly, on the subsea comment on your customers winning new projects, we've got a three-month kind of lag before onshore-
Mm-hmm.
-benefits or the impact to you guys? Are we thinking 9-12 months on subsea?
It'll be 2017, I mean, there is the issue about more orders, but one of the things I think I should make clear on subsea, these are projects that actually got their financial investment decisions cleared actually probably two years ago. And normally, once you get FID, the things go, and they don't want to hold them up. But actually, as you, as I think as you all know, they've pushed them to the right. So these aren't new projects. These are pre-existing, pre-financed projects that they just decided to push to the right, including the thing that staggers me, the gas fields. I mean, why, why is gas fields impacted by the price of oil? Don't know.
But, yeah, they all got pushed to the right, and now what we're seeing is 2017 releases on these subsea projects, which is good, you know. So, it's more about timing of releases, and our customers have actually, you can read them yourselves, you know, their quarterly statements, they're all flagging up releases into 2017. So that gives me quite a lot of hope there.
Mm-hmm.
Hi, it's Wasi Rizvi at RBC. I was interested in your business comment that's concentrated in certain places. So does that mean there are some facilities that were quite dependent on that, on revenues from that space, and then how are you managing profitability in those sites, or is there more you need to do on that?
Yeah, I mean, it's a good observation. I mean, actually, it's in Wichita, which is sort of the business jet capital of the world, it turns out. And it's on specific types of business jets, in that area. And the answer is yes, we had a number of facilities that were focused on that. And, in fact, one of the things that's happened out of all this is we've merged two of the facilities into one. So, you know, we've actually taken account of that. They still are nice businesses. It's just that they are a chunk less than they were.
So there would have been some profitability hit in the first half that perhaps doesn't repeat because having merged the facilities?
Say that again, please.
There would have been a profitability hit from that decline in biz jets that perhaps doesn't repeat, but because you've taken some actions to merge those ones.
Yeah, it's a one-time step down, and it's flat now going forward. It's effectively a rebasing of the U.S. business down a little bit and then up from there.
Thanks.
Just two questions, actually. Firstly, just in terms of aerospace, obviously, you talked about strong demand going forward, 1% growth in the first half. What kind of sort of run rate can we see for aerospace, and particularly the U.K., second half and into 2017? Just views there, please. And secondly, was just on the new technologies. Obviously, HIP, PF, and surface are going back—or not going back, but they're having a tougher time, but the percentage of the group is going up. Where are you seeing the strong growth in Surface Technology , sorry, the specialist technology?
Okay, so U.K., U.K. aerospace growth, I think we would be talking, mid-single digits, in the second half is what we're probably looking at there. In terms of the Specialist Technologies, where is that going? Well, that's a $64 billion question. I don't know. Just upwards and forwards. Where are we seeing the growth? It is in particular things like Low Pressure Carburising . So I mentioned, the emerging markets, plus, Specialist Technologies helping, being helped by automotive. And what you're finding, particularly in places like Mexico, which for us is an emerging market, developing economy, a better term, we've got, deployment of Low Pressure Carburising and Corr-I-Dur, which are two of the Specialist Technologies in Mexico with extremely strong growth. And that's in automotive on new automotive programs. And our automotive growth in, these areas is new program-driven.
I just wanted to let people know that. It's not... We're not relying on growing production rates in auto. What we're actually doing is picking up new programs, which is extremely good. So I know a lot of people are getting a little bit worried about auto because it's been so strong. I think as long as it doesn't go down, we're very, very happy because we've got a lot of program builds going on over the next 3-4 years. The other area is specialist stainless steel, of course, which is just, you know, moves on ahead in all kinds of places. And part of our investment program has been to bolster the Specialist Technologies, so we're opening a new center of excellence for HIP product fabrication in the United States. We're building new greenfield plants for Specialist Technologies.
We're building new LPC plants. There's a lot of work going into the Specialist Technologies.
Mark Fielding from UBS. Actually, just literally an add-on to that one. Could you just maybe go into a bit more detail in terms of expanding that specialist technology coming? What, what is the approximate end market split today? Is it similar to the rest of the group in terms, or, or is there some biases? I'm thinking partly 'cause I've seen some of the energy stuff, for example, was in specialist technology and how that's affected it.
First of all, half of the Specialist Technologies are in ADE, and half are in AGI. So there's a rough split. If there's a bias, it's slightly towards ADE, although I, I'd have to do the calc on that because oil and gas has come off, and two of the ADE ones are actually heavily impacted, so it might have rebalanced a bit, from that perspective. But we've got HIP Services in the ADE port, and HIP Services is extremely strong, and it's a very good business, has been for some time. Okay, I think, unless anybody else has got a final question? Oh, we got two.
Oh, oh.
Just before the hammer drops.
Sorry, Henry Carver from Peel Hunt. Just if we go back, I think, for me, the results, you talked about some strategic price downs.
Yes.
that you were giving away, particularly, I think, within oil and gas.
Yes, absolutely.
Maybe could you just give us an update there, whether you're seeing some of that pressure abating?
Yes. So, what I can say is that we did do it, we aren't doing it anymore, and in fact, we're getting better pricing. So it's, that's an interesting series of phenomena going on all around the place, but we're, you know, we have as a company, as a business, we've got pretty strong pricing power. And, we made a decision, as you rightly remember, and now we're back to where we were, so we've got, price increases keeping going forward.
I'd just like to ask a question I've asked before, I think, which is the momentum in outsourcing. But if we couple that to market share gains-
Yeah.
I think the latter's been quite a good feature in automotive in North America, for example. But if you could just update us on that, please.
So there are a number of outsourcing projects underway at the moment. One of the interesting phenomena are the number of long-term agreements being signed, particularly in aerospace. And this, of course, is as the new supply chain comes on board for the new platforms. Basically, if you're not on the new platforms by now, you're never gonna get on it. And so what people are trying to do now is to secure the position. And so what they want to do with us is to sign an LTA for the future work that's coming as a result of that ramp up. And that's a sort of outsourcing thing, 'cause that future work used to be done in-house.
So we're actually in Farnborough for us, even though Farnborough was quite quiet this year, those of you that went, I mean, we were just inundated with people trying to nail us for long-term agreements. Not necessarily good for us in LTA, by the way, but, you know, they want to secure capacity. And so there's definitely in aerospace, you're seeing more aerospace outsourcing. And in automotive. General industrial, no. If anything, general industrial is cool, because one of the problems you've got, of course, is with a declining general industrial picture, the in-house capacity is slowly... You know, they've got more of it, so they don't feel any kind of pressures there.
There will come a point where they might look at it again, but outsourcing gets driven typically by sharp events, not slow, you know, slow slowdowns. They don't really look at it. If there was a sharp slowdown, people would say, "Oh, should we get out of something like our, our heat treatment business?" So general industrial, no, if anything, there is a, you know, it's a static situation there. Increase in the aerospace and increase in auto.
Is general industrial the main area where your customers still have in-house capacity that they can pull back into?
No, I wouldn't say that. The proportions are probably higher in-house capacity in automotive and aerospace.
Okay.
Because our GI business is characterized by thousands of little customers generally, who've never had their own capability to heat treat.
Yeah. Okay. Thank you.
This is really the last... Oh, we've got another one.
It's Robert from Morgan Stanley. I just had a question around the headcount reduction. You mentioned that it'd come down since year end. You had more sort of temporary employees. How much of that is kind of Brazil related? Are you sort of actively managing your sort of headcount and the portion of people that are on flexible versus non-flexible working contracts?
So for sure, Robert, we always manage the headcount. But of the reduction year-on-year of 300 or so heads, half of that is actually Brazil, so that's absolutely a valid observation.
I would just add that, I mean, one of the things that we've done, because let's face it, it's a very unclear situation going forward. I mean, one of the things that we've done is that we've actually, internally, we've said, "If you need more people in the plant, they're gonna be temporary." You know, this is not a time to be taking on fixed labor, which is why you've seen the temporary headcount going up. So there are parts of the group that are growing, but rather than take on full-time staff, we're putting temporaries in there. So should there be some kind of reversal, we've got the flexibility.
Are you using sort of natural attrition, when people leave-
Yeah
Okay.
The only hires that are happening right now are other than places like North America, where temporaries are full-time really, you know, if you get leavers, then they're replaced by temporaries, unless they are senior staff, which would be slightly different. Yeah, highly skilled technical people and senior managers are not temporary.
Great, thanks.
So the new FD will be-
I was just about to make a crack about that. Yeah. Yeah. Unlike the FD, he's a bit temporary. At the back.
Hi, it's Andrew Wilson from J.P. Morgan. And just a quick one on acquisitions. It strikes me that you are being very disciplined with regards to not making, obviously, you know, deals, given the state of the balance sheet, gives you quite a lot of capacity to pretty much do what you like. Can you just talk about almost what the constraint is? Where... I mean, is it a timing thing because they're small businesses and it's succession, or, you know, is it one theme, or is it just, you're just genuinely looking for very good returns on it?
Okay. So the acquisition, let me describe the picture for you in total, okay? So when we're talking about bolt-ons, the vast majority of these are small, family-owned businesses. And what happens with those businesses is that the sell decision tends to be a generational issue, or just a really long slog, and they have finding times are tough. Now, what's happened, particularly with the general industrial area, where a lot of these guys are concentrated, is that we've seen, as we know, quite a slowdown over a couple of years. So it's getting tougher and tougher. And what's happened is that these businesses, we try and keep in touch with them, the ones that we want, and there are more coming to market. They haven't necessarily changed their price expectations, but there are more coming to market.
But if you've seen the acquisitions that we have made, we don't pay a lot of money for these things, okay? I mean, there are very few buyers in this universe. So it's not that we're constrained because of people's price expectations are too high, it's them coming to market. And then, when you go and buy these small businesses, you can imagine they're not necessarily run as all of them as a, you know, a good, tight, professional organization. If we find environmental problems, we don't touch it. If we find they've signed funny contracts that are suicide missions, we don't touch it. And then, that's the kind of thing that happens. So when you get right to the edge, and you've done your due diligence, you'll find something coming out.
There are enough choices out there that we don't feel forced to do anything, and we certainly aren't going to do anything that will detriment the company. So we are patient about it, but there are more targets coming about. I hope that answers your question.
Yeah, absolutely. So it's basically just discipline and then timing.
Yeah.
No more difficult than that.
Yeah. Just boring, really. That's the way we are.
Thank you.
I do think we've come to the end of questions. Yes. Well, thank you very much, everybody.