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Edited Transcript of BOY.L earnings conference call or presentation 25-Jul-19 7:45am GMT

Half Year 2019 Bodycote PLC Earnings Presentation

London Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Bodycote PLC earnings conference call or presentation Thursday, July 25, 2019 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dominique Robert de Lisle Yates

Bodycote plc - CFO & Executive Director

* Stephen C. Harris

Bodycote plc - Group CEO & Executive Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Andrew J. Wilson

JP Morgan Chase & Co, Research Division - Analyst

* David Alexander Larkam

Numis Securities Limited, Research Division - Analyst

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Michael John Blogg

Investec Bank plc, Research Division - Capital Goods Analyst

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

* William Turner

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [1]

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So good morning, ladies and gentlemen. A very warm welcome this morning. And couldn't help that, I'm sorry. I'm Stephen Harris, Group's Chief Executive. On my right, as usual, is Dominique Yates, our CFO.

Let's move into the business of the day. So I'll take you through the overview and the business review itself, hand over to Dominique who'll do some work on the financial review and then I'll come back and talk about the summary and outlook.

The -- so moving on to the overview. So some high points in our results. We've got Civil Aviation revenue growth, very pleased with 21% growth there. Our Specialist Technologies revenues up 4%, that's an improvement over the 3% growth that we saw when we did our last trading statement, but still not yet up to the kind of numbers that we would expect for this business that -- but we should see -- still see some acceleration of that as we move towards year-end.

Emerging Markets revenue growth 3%, still quite positive. But of course, the big negative in the numbers is the Western European car and light truck revenues where we had a decline of 16%.

Now I'm going to go through all of these in some more detail as I move through the presentation.

We did invest GBP 38 million in acquisitions and expansion projects, which we'll talk a bit about as we move on here. Overall, we have a 1.5% revenue decline, that's 0.4% at actual rates, with a 7% decline in headline operating profit.

But I think very pleasingly, the margins are quite resilient at 18.3%. And one of the reasons that we're quite pleased about that if you see where the negative points are in our business, it is the Western European car and light truck. And if you want to reduce costs in the world, the hardest place to do it, the social democracies of Europe. And what you find there is it's difficult to start with, it just takes more time. And we will talk more about that.

Dividend 6p, increase of 5.3%. So then if we take 3 different looks at the business through different lenses. So if we look at the 2 technology groupings we've got. So Specialist Technologies up 4%. And of course, the larger part of the business in revenue terms, down 3% Classical Heat Treatment. And in terms of the geographies, Western Europe, you can see it there, by far, the largest part of our business in geographical terms, down 4% in total, but we got growth in North America and the emerging markets.

And then by the actual market segments themselves, Aerospace and Defense in total, up 16%. A 2% Energy decline, that's perhaps a little bit counterintuitive, we'll talk a bit more about that. Automotive, negative 8%. And general industrial, negative 7%.

So let's look at the Specialist Technologies and what's going on here. So this accounts for about GBP 90 million in the half, we've got a growth of 4%. So we are seeing a continued rate of increasing rate of adoption of Specialist Technologies now. So how do you measure that? It's by numbers of customers as opposed to revenue. What happens when people adopt these technologies? It typically provides a good boost to their business because they have an attribute that they are making use of, which is pretty much unique for them in their competitor set, and so they tend to grow quite fast as a result and that, in turn, drives revenue growth for us. But one of the key metrics for us is what's the rate of customer adoption, numbers of customers and that's still improving quite nicely.

So we've got strong growth from the civil aviation sector, particularly for HIP services. And that's quite interesting. There are an increasing number of parts in engines that are being HIP-ed. And that is a nice growth rate going on there. It's one of the reasons why we're putting in the extra capacity. And then we've got our Powdermet business. And the Powdermet business is really getting traction now. It's the one part of our business where we do have an order book. And the order book which will start the reflection in the order intake rate that we've been seeing and the growth in the order book, we'll start seeing the results of that towards the end of the year. So that's good for the second half and beyond. The growth here, very definitely subsea, but we are seeing now adoption of this technology in aviation. And we've got our first parts going on wing. And as well as that, if you look at the superalloys that are being used in the engine, they're now starting to be made out of powder and we're HIP-ing this to make the superalloy. So a very good future there. It's very, very, very interesting.

In 2 of the other parts of the specialist technologies, we saw some negative impact. And I want to highlight this. We don't look at these as market-driven issues. They are very, very specific customer issues. So they do happen to be in automotive, but that's not -- it's not the automotive background that's driving this. The first one in S3P stainless steel where we actually had a customer make a product change, and they've gone to completely different products. It doesn't use the stainless steel hardening approach [to life.] And so that was quite a chunk of business out there. And the one thing about, of course, automotive applications, they tend to be high volume in and of themselves. So if you lose a product in there, it tends to be disproportionately impacted. And then the other one we had is we had a low pressure carburizing project in Europe that was canceled, and that was actually on transmission system destined for China, CVT, constant variable transmission, that was being built in Europe, for the Chinese market. And actually, what happened is that the customer got bought by a Chinese company and they moved the production to China.

So those were 2 specific issues that hit us. The good thing about them is they're not part of a trending downward issue. They're in elimination and once you've eliminated, that's it, it stopped. So we do expect to see Specialist Technologies start -- to start picking back up again now.

Emerging Markets. I don't think huge surprise here in the China issue. So the growth there is reduced to 5%. That shouldn't be a surprise to anybody given what's going on in the world. The Eastern European area is an interesting one. So we see this repeated every time there is pressure in Europe -- in Germany, in particular. What happens is the Germans tend to have multiple supply chains and one of their supply chains will be in Eastern Europe. And what they try and do is level load their facilities in Germany itself. They don't try and vary the labor force for a number of reasons. Number one is there tend to be workers on the board and they have Workers' Council members there. And the other one is, in fact, is eliminating the workforce in Germany is very expensive. Whereas if you turn around to go to Hungary or Slovakia or Czech, it's a lot easier and it doesn't cost them very much. So their approach has always been to flex capacity in Eastern Europe and maintain capacity in Germany, in particular. That affects us because we supply into Germany, yes. So we see a constant output to Germany. But in Eastern Europe, we see it go down. But then again, in Eastern Europe, we can adjust cost quite easily as well. In some ways, it's a blessing in disguise because the labor market in Eastern Europe has up to now been very, very tight. And so they're [stabilizing] in those [players]. But -- so that's the Emerging Market story.

If we go through the sectors. So here we've got the automotive impact and you can see the decline. Now what I will say is what's happened actually is, if you just drew a straight line from 2017, that's the kind of number that we're back to because you will remember that the WLTP regulations came in and actually in September in last year and in the build-up to that, what happened is, people were preshipping so they didn't have to meet those regulations. So we saw quite a boon in the first half of last year. As soon as the regulation hits, the market stopped. And now we've got a decline here that's going on, and we're about back to the '17 levels. And if you look to the underlying run rate, what we see in general is automotive, North America, particularly United States, very slightly improving. And automotive Western Europe declining, but not by the kind of numbers that you're seeing here. The background rate is a decline that's lower than this. And then in general industrial, I need to point out that 2% -- 2 percentage points of that 7% decline in GI is actually associated with businesses that we discontinued. So the actual underlying decline in GI is 5%. And of course, part of the GI business is associated with supply into automotive because you get tooling, for example.

But I think it's worth noting that we are actually seeing -- we saw a pause in capital investment projects. Projects that we were expecting to be released and to get going actually paused, and it should be no surprise by now to people to hear that, yes, Q2, particularly June, was quite an interesting time. I mean, it was tough Q2 June, and you saw this pause in capital investment projects. If somebody asked me, has the -- [it] gone away, well I can't tell you that. We won't really get a lot of information now until we get to September because we're in the summer doldrums here. Activity is quite low, but it was quite noticeable and we saw that in June.

Just want to make one more comment on that, I think before I move on and just repeat what I said before. The worst place to get an impact in revenues is Western Europe, particularly France and Germany. It just takes time to take costs out, and we are on with that. So we should start seeing more of that coming through. I do not expect to see us announcing any exceptional restructuring charges or anything like that. We won't be doing that.

If we go then on to the stronger areas, our Aerospace and Defense up 16%, civil aviation up 21% within that. Now the big driver for the excess growth, if you want to call it that, for us, is LEAP. And here, we've got both the volume increase in LEAP that's been going on, plus our content improvement. And those of you that hark back to the Capital Markets Day, you might remember the presentation where we were talking about how much more content we've got on the LEAP. That's not to say that there isn't activity elsewhere because don't forget LEAP is only one small portion of our Aerospace business. We've got the ongoing good business growth in Rolls-Royce.

And I think we should bear in mind most of our business is aftermarket. We're actually providing consumables into the engine, like turbine blades is a big part of our business. And then the actual platforms that we're going on to are all 3 of the majors. So that we've got the Rolls-Royce, we've got the Pratt & Whitney and we've got LEAP.

So I will kind of preempt, if I may, the MAX question before anybody asks it. So what's the impact of MAX? The impact so far to Bodycote is precisely the square root of nothing. No impact at all. What we are -- will probably be seeing is a little bit of a tick up in the LEAP 1A. That's the LEAP that goes to the Airbus platforms. And eventually, we'll be seeing a little bit of a tick down in LEAP 1B. But please remember, first of all, that as we supply into the engines we are supplying -- we start supplying to the engines 2 years before they actually get on wing because we're right -- we start at the beginning, the castings and the forgings all the way through the build phase. So any change in numbers of engines today in our sales is going in for engine in 2 years' time. We aren't anticipating any major impact from the MAX question, at least not the way it looks at the moment.

But -- so if we look at the energy side, it's quite interesting. Industrial gas turbines continues to weaken. I don't know where that's going. A lot of people thinking that it would bottom out, but it's still weakening. But the oil and gas revenues what I find particularly interesting. So we've got very strong subsea growth. That's driven by our Powdermet business. But what we have seen is onshore weakness and for onshore here read Permian Basin, the background business in the Permian Basin actually is growing slowly, but it's growing. But what we have here, there's a bit of a technology change that's taken place in the Permian Basin in terms of pumping equipment. And we just happen to be exposed to the older technology more than the newer technology and that's being rectified at the moment. So that's what the negative side of the onshore side -- oil and gas was about. But the Permian Basin, in general, the background there is a slight growth.

So one of the things that we try to do is particularly when times are tough, we invest for growth. We believe in taking destiny into our own hands and investing in the business and now is a very good time to do it, particularly in acquisitions. So you might recall that our bolt-on acquisitions, we are typically buying from family businesses. Their price expectations do not change with the climate of the economy, but what happens is their readiness to sell does. And so what we're seeing is a number of businesses coming to market, and I have talked about this before. So we bought 2 in the first half, one in Scandinavia with a very good exposure to mining and one in Slovakia and for us, that means it's a new country in our emerging market's portfolio. That business in Slovakia is highly exposed to nitriding. And once again, if you go back to the Capital Markets Day, you might recall the nitriding is one of the key technologies for electric vehicles. Indeed, there are some contracts in this for that. So that's 2 acquisitions. We still have a very healthy pipeline. These bolt-ons so looking to the second half, we may see some more, but of course, that sort of timing is in the lap of the Gods on acquisitions.

HIP capacity, so our European HIP, very large HIP that we put in place is now operational. And we've got more HIP capacity coming on till the end of the year, and it's sorely needed. I mean, the pressure on us for HIP capacity being, by far, the world's largest supplier is intense. So this will actually also help in our growth phase here. We continue to invest in the S3P capacity. We've got more capacity going in to keep up with the growth that we're seeing coming through. As you add the customers, their volumes will grow. We're going to need this capacity. We've opened a new greenfield in the Czech Republic. So it's an emerging markets business. And we've also got another one going in, in Hungary, which will be operational at the beginning of 2020.

So let me hand over to Dominique.

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [2]

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Thank you, Stephen, and good morning, ladies and gentlemen. Chart 12 summarizes the group's financial results. As Stephen has already highlighted, the first half of 2019 has seen some challenges, particularly in the automotive and general industrial markets in Western Europe. So overall, with help from the strong growth in aviation, revenues were slightly down 1.5% lower at constant currency in the last year, but group margins were very resilient, 18.3%. Headline earnings per share was 6% down. Cash generation remains strong with free cash flow of GBP 45 million in the first half, even after the normal seasonal working capital outflow that we see in H1 -- more on free cash flow later. And following our progressive dividend policy, as Stephen's already highlighted, the interim dividend increases 5.3% to 6p.

Chart 13 shows the operating profit bridge, 2 points really to bring out on this slide. Firstly, through active and diligent cost management as well as the impact of price increases, we have once again been able to more than cover the impact of cost inflation from utilities and wage increases across our business. Second thing to highlight here is, at the year-end, we reported that we were working on a number of new facilities, and we see that these new facilities have actually been a slight drag on profitability in the first half. As obviously these facilities ramp-up, then we should see to start to see that negative impact on the profitability improve.

Chart 14 shows the divisional performance. So in case you're wondering why ADE growth isn't stronger than the 3.3% shown here, 2 things to highlight. Firstly, around 20% of the ADE division's revenues are actually general industrial, and we saw some weakness in the general industrial market. Secondly, we have some discontinued operations, which took a couple of percentage points off the growth rate there. Positive operational gearing from this revenue growth in the ADE division though helped boost margins to 25.1%, 1.6 percentage point increase from last year. On AGI, we've experienced a margin decline in the first half, and this comes entirely from our Western European AGI business, which constitutes 60% of the overall AGI business, and which, as we've already heard, experienced significant revenue declines in its automotive business, in particular, as well as some softness in general industrial.

Chart 15 presents the group's results by major currency. And when we can compare with last year, I think it will be no surprise there, reflecting on the weakness that we've already talked about in Western Europe, that the percentage of operating profit from euro-denominated business has fallen while that of the U.S. dollar-denominated business has increased.

On to taxation and balance sheet on Chart 16. We guided tax rate to 24.5% for 2019. So the headline tax rate of 24.4% that we've seen in the first half is bang in line with our guidance. And it also reflects our expectation of what we're going to achieve for the full year. As you all know, we've got a very healthy balance sheet and still have GBP 200 million of funding headroom on our GBP 230 million revolving credit facility. At the end of the half, we did have net debt of GBP 25.5 million. More on the cash flow later and I'll explain how we got there. Following the introduction of IFRS 16, we also have GBP 86.3 million worth of lease liabilities on our balance sheet at the end of period. So that gives us a net debt, including the IFRS obligations of, GBP 111.8 million.

So a little more on IFRS 16. A quick reminder, IFRS 16 is designed to bring leases onto the balance sheet, essentially creating a what's called right-of-use assets or what are called right-of-use assets on the one side of the balance sheet and recognizing outstanding lease liabilities on the other side of the balance sheet.

So this Chart 17 shows the impact of IFRS 16 on our 6 months results. I think what's clear in summary is that there really isn't much of an impact on either the cash flow or our group earnings. Where there is an impact, it adds GBP 8.4 million to our headline EBITDA and it adds GBP 80 million worth of right-of-use assets and GBP 86 million of lease liabilities. So the real impact of IFRS 16 is on the balance sheet rather than anything to do with the P&L or cash flow.

Moving on to the cash flow, Chart 18. We generated GBP 44.6 million of free cash flow after the normal seasonal working capital outflow of GBP 13 million in the first half. And as you know, that is an outflow that largely unwinds in the second half. Against last year, free cash flow is GBP 6 million lower though as we spent more on maintenance CapEx in the first half of this year than we did in the comparative period and that's purely down to timing.

So Chart 19 reiterates the discretionary capital allocation priorities for the group. So investing in the business is the priority followed by distributing ordinary dividends to shareholders. And as usual, we're also pursuing bolt-on acquisitions. And if we have any spare cash, then we will return that to shareholders via a special dividend.

Chart 20 is the graphical representation then of what's happened in the first half. We generated the GBP 44.6 million of free cash flow. We've invested GBP 38 million in the business, including GBP 23 million there on the 2 acquisitions that Stephen was alluding to earlier. And we've returned through the ordinary and special dividends in the first half, GBP 63 million to shareholders. And that results in the net cash outflow in the first half of close to GBP 62 million ending up with our net debt position of GBP 25.5 million at the end of the first half.

So now I'll hand you back to Stephen for the summary and outlook.

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [3]

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Thank you, Dominique. So we move straight into summary and outlook. So let me just give you a little bit of background on our guidance issues here. So we -- the Board isn't expecting any changes for the full year. Clearly, that in place, we're going to have a stronger second half than we are in the first half. I think it's worth noting we are not expecting, we are not anticipating in this any improvement in the background macroeconomic conditions -- that is not what we're looking at. What we are expecting is to see the impact of acquisitions coming through, to see the impact of our new start-ups coming through and to see the impact of our growth in order books, for example, in Powdermet plus continuation of the areas of where we have seen growth. Equally, well, we're not expecting or anticipating any further downturns. So the actual running rate coming out of Q2 at the half is what we're anticipating for the full year. So that should give you some context for this overall situation.

So with that, I'm going to move over to questions and answers.

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Questions and Answers

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [1]

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This is William Turner from Goldman Sachs. I have a handful of questions. So is it okay if I just ask them one by one. The first one is on Specialist Technologies and you talked about some company-specific issues you had, which meant the growth wasn't as high. How high would the growth have been if those issues didn't occur?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [2]

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Sure. Do you want to answer that?

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [3]

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It wouldn't quite have been double-digit growth, but it wouldn't have been very far from double-digit growth. So it had quite some impact on the growth rate or the 2 issues that Stephen mentioned had quite some impact.

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Okay. And then at the trading update a few months ago, you mentioned an EU state aid tax litigation or issue. Has there been any updates there?

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [5]

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Not really, no. There's no further update on that. I know that the U.K. authorities have appealed against the decision on the case, but there is no further update.

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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Okay. And then my final question is the civil aerospace growth of plus 21%. That's obviously quite a high growth. Can you give a bit more breakdown? I know you mentioned the LEAP engine, but it's not going to be clearly all end-market growth. So what?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [7]

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No, no. Not all.

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William Turner, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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So how much of that 21% do you think was end market versus the new programs or acquisitions or something like that?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [9]

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So I'm not going to break it down to -- in too much granularity, but let me just give you some of the numbers. So you would expect the aftermarket to be growing at the moment somewhere around 6%, maybe 7%, depending on the program you are on. Don't forget that we are highly exposed on the aftermarket to Rolls-Royce. The Rolls-Royce [rectification] program is in full swing. So in fact, the revenues to Rolls-Royce are higher than the normal background anyway because of the rectification program that's going on. So that's a big part of our numbers anyway. The new products going out, primarily the LEAP, that is sort of what I would call the top end of the growth, I've said that. Without the LEAP expansion program, one might say we would be expecting something like -- but I mean, by that is, if we didn't have the higher content on LEAP than we do -- that we have over and above the CFM, one might have expected our numbers to be something like about 16%. So the extra point between that is -- and this is an estimate, obviously, is to do with that premium growth on LEAP. And of course, the LEAP-1A is cracking along there. And the LEAP-1B is too and in fact, it's quite interesting that the early side of the LEAP program, in other words, the forgings and like are still under pressure. So whilst people talk about the plane count going down and whatever, it really doesn't affect the bulk of the supply chain at this point in time.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [10]

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Michael Blogg from Investec. Could you just give us some feel for the likely revenue from the 2 acquisitions in the second half or annualized? And how close they are to the margins that you're reporting in the respective divisions?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [11]

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I think you should assume that the margins are group average. And in terms of revenue is concerned, I mean, it's typically 1 for 1.

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Michael John Blogg, Investec Bank plc, Research Division - Capital Goods Analyst [12]

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So GBP 1 of revenue per pound spent, you mean?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [13]

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Yes. These are probably slightly better than the average margin.

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [14]

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(inaudible) numbers. But it's -- in terms of contribution to the second half profitability, order of magnitude, somewhere in the GBP 1.5 million to GBP 2 million range.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [15]

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It's Andrew Wilson with JP Morgan. Just 3, probably quite quick ones actually. When you mentioned the customer hesitation in the Q2 in...

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [16]

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[Capital] spending.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [17]

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Yes, on capital, yes, yes. Is that -- was there any particular regional market that you kind of -- or is that just a general...

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [18]

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Well, it was in general and I will say that the biggest pause area was Mexico. And the timing of it was quite politically connected.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [19]

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I understood. And just on the second half guidance where you kind of talked about the exit [run way.] And I think it makes a lot of sense when you think about all the internal things ultimately that are driving that. Is that a general comment on all of the markets? Are you not expecting to see a real -- because basically what I'm getting that, is there any difference between what you're seeing in terms of first half run rates across the different end markets to what you're expecting in the second half as a whole or are there specific markets where you actually -- you can see something different happening?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [20]

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As far as the markets as opposed to our sales, let's be clear...

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [21]

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Well, I guess, I'm interested in both actually.

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [22]

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Okay. So what are we're expecting is that portion of our sales that are driven by the general macro trends, across all markets, we're not expecting that to change, right? But within those, there are specific exposures that we have that we are expecting to change. I mean, it will depend on the Mexico situation, but the LPC growth should turn because we have a high concentration of LPC in Mexico, if that pause stops in Mexico. And that -- the Mexican growth is a lot of it's driven by work that's being moved by our customers from the U.S. to Mexico. And that's one of the reasons why the pause happened and that is what's happening here. So if that restarts, we will see, specifically in our LPC business that will turn up, but we are expecting impact from our Powdermet technologies to be kicking in your HIP services, and they're not really background market [transitions.]

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [23]

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That's very helpful. And then just, I guess, [positive] one for me, but just in terms of the kind of price cost dynamic because, I mean, clearly, that's been another good story, I guess, in terms of the margin you can see that come through. Again, sort of any -- interested in kind of how that's trending if pricing is becoming easier, harder...?

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [24]

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I'll answer that. So what we saw is some pretty stiff price increases that we put throughout there in anticipation of tight labor markets and inflation in labor. And that was extremely successful. I think we were not quite as clairvoyant, if you like, on the utilities. Because what we've seen is the utilities hike, that's really, really large in particular countries. And of course, in different parts of the world, they use utility prices that is a proxy for taxes in some instances, you're seeing very strong increases in utility prices. Now for us, we haven't anticipated that, but what happens with a portion of our business is we're having a long-term contract and we have indexed utilities into the price. The only issue with that is the delay. So where we're seeing these utility prices coming through, we will see the price impact of that starting in the back half of the year to come in as a price increase and that will flow into next year. So in terms of future price increases, we will not be -- unless there's some massive dislocation out there, I don't think we'll be pushing for the same kind of price increases that we saw in certain sectors at the beginning of this year and the end of last year.

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Andrew J. Wilson, JP Morgan Chase & Co, Research Division - Analyst [25]

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Yes. Okay. But I guess, the net effect is still going to be positive. I guess, it's just you don't need to do as much.

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [26]

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Yes.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [27]

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It's Andrew Douglas from Jefferies. Just 2 quick questions, please, if I may. Can you give us an update on where -- on any progress made on the U.S. AGI challenges that you had last year? You talked about that last year. And also, just thinking about subsea, which, I guess, is going to be a decent part of that improvement in Specialist Tech in the second half. Clearly, that market is very buoyant and we can see that from all of the companies that you guys are exposed to. Have we seen that order book momentum continue through the year and [not sort of for the] 6 months? And are we expecting that to continue? Because it looks like a lot of projects.

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [28]

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Yes, I'll do subsea first. The answer is yes. We are expecting it to continue. And indeed, there were a number of outliers out there that weren't using that technology. Some of those companies that would ask us to take liability for the entire universe we didn't do business with them. And they have moderated their demands on that, and then they know more and at the same page as we are. And so now they are purchasing from us and that, in fact, is giving us greater exposure in addition to the general uptick. So I think that's an indication of the fact they really recognize the value add. And so everybody's is buying into it.

As far as the U.S. AGI side is concerned, so you will recall, there are 2 problem plants there. And we are well on with those. One is, in fact, a new facility. What we're doing is we're actually closing one facility down and opening a new facility. So that is well underway. And the other one is more of a reorganization of the markets that are being addressed. But no quick fixes on those things. You have to do it sort of as time goes by. We'll see that the -- those really come into play somewhere near the middle of 2020 we'll have sorted those problems, I expect. One in the front. Go on.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [29]

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Dave Larkam from Numis. One quick question, [a bit longer,] please. Firstly, what's the CapEx number going to be for full year? And then secondly, on ADE, I mean, those margins keep sort of nudging northwards every time you report. How should we think of it -- I mean, obviously, there's a lot of specialist technology in that area. There's a lot of HIP-ing, which obviously requires a higher margin to get your return on capital. Just talk how that may progress over the next 2 to 3 years. Is 30% an achievable number if we get the balance right or...

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [30]

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I'll take that. [No.]

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [31]

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Is that clear? So -- I mean, Dominique mentioned operational gearing. He was really referring as much as anything there to the Classical Heat Treatment side, but there is a big impact of the HIP services issue in there and our HIP margins are over 30%, and that's what pulls it that way. But the Classical Heat Treatment side, I think we're kind of where we need to be, which is just somewhere over 20% in the Classical Heat Treatment for that business. And so no, I don't expect that to go to 30%, please cool your jets on that one.

What was the other part of your question?

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [32]

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CapEx.

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [33]

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CapEx. I think we said GBP 80 million to GBP 90 million for the full year, expectation in terms of CapEx spend in total and that would -- that remains the same. And within that you would expect GBP 35 million, GBP 40 million or so to be maintenance CapEx and sort of the remainder being expansionary CapEx.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [34]

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Mark Davies Jones at Stifel. 2 things quickly, please. On the pressure pumping technology change you were referring to, can you give a bit more color on that? I'm not sure I heard you speak to that shift before.

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [35]

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No, I haven't, it's a brand new thing.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [36]

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Okay. The second one was on automotive and the softness in the first half and the weakness in specialist. A lot of that you say is attributable to a couple of one-off customer events. Isn't the rest of those customer events in terms of rationalizing product range, relocating their production are exactly the sort of things that happen when the market is very soft and you could see more of those one-off events to come?

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [37]

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Good question. So let's do the automotive one first. That sounds like a very logical thing to say. The only thing I could say is that the -- both events are actually the result of actions that were taken about 2.5 years ago. Okay. So the product change, when an automotive player changes a product, they don't just do it like that. So they would have been looking down the pike and saying, "We're going to change it." And what they've done is they've changed it to a different form in -- it's not even a trend associated with EVs or anything, this is internal combustion engine issue. So they've actually changed the product in their internal combustion engine and they started 2.5 years ago. So I don't think that's got anything to do with the current situation. The LPC cancellation, is it the result of an acquisition issue. Once again, I don't see that -- I don't see the things that we have seen today as being associated with automotive weakness. That's not to say that maybe something else might come out the pack, but these are not associated with macro trends, I don't think.

As far as the oil pumping issue. No, we've not talked about it before. It's something that is new. Essentially, the -- what was happening in the past is there were some range of fracking pumps that we did a lot of business on. They had come out with the premium life pumps, very good [ware cachets of interest] on the pump because these fracking pumps, they really do see heavy duty and they come out with some premium life issues there. But one of the things that people worked out is that with the on/off situation you get, particularly in the Permian Basin because the Permian now is I think as everybody knows, has become the swing of the oil producers. And so what they do is they stop and then they start and then they stop and start. And it just so happens that when they do that, they change the pump. So it's a bit silly buying a 5-year pump when they only last for a year now because you have got to change it out at the next startup. So that's the technology change that [was --] driven the technology change. And so we had disproportionately exposed ourselves to these premium pumps because generally, we try and chase premium products anyway. And now there's less of the premium pumps and more of the shorter life products. But I think once again, there's opportunities in this because the -- some of our technology, particularly Powdermet, lend themselves into that area and people are now looking around. "I used to have a premium product." And if you remember back to the Capital Markets Day and (inaudible) was up on stage and showing you that [valve liner.] He was up there in the [pump liner.] Well, that actually is the kind of technology that lends itself for these guys to be able to produce actually a premium pump which does have uses, I mean, they're not all shut off, but with much lower costs. So that's actually pulling a bit of demand in there. But that's what that issue is about. I hope that was clear enough.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [38]

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It's Robert from Morgan Stanley. I just had a question around your expectations for the rest of the year. You mentioned you're expecting the sort of June run rate to continue, yet lots of the lead indicators are obviously still going down, [PMIs] are still coming off. I guess, what sort of gives you the confidence that it's not going to be a bit softer in H2 than H1?

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Dominique Robert de Lisle Yates, Bodycote plc - CFO & Executive Director [39]

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It's an assumption that we make from the way we look at it, so we have not had great success in correlating [PMIs] with our business in the past. So we tend to ignore -- and what we look at is our own business, frankly. You may have a different view. But that's what we're working on the basis of.

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Stephen C. Harris, Bodycote plc - Group CEO & Executive Director [40]

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I wonder if we could call out to a close now, yes. There's time for one last question and that's it.

No, I think we're okay. Thank you very much, everybody. I look forward to seeing you again soon.