Bodycote Regulatory News (BOY)

Bodycote plc

Results for the six months to 30 June 2018

Statutory results

Highlights

· Revenue growth of 8.7%; headline operating profit growth of 15%5

· Further improvement in return on sales to 19.0%

· Free cash flow of £39.4m

· Specialist Technologies' growth of 11%5

· Emerging Markets' revenue growth of 22%5

· Interim dividend of 5.7p, up 8%

Commenting, Stephen Harris, Group Chief Executive said:

"Bodycote has enjoyed a strong first half of 2018. Robust growth has continued with double-digit revenue progression in Specialist Technologies, contract wins on automotive and aerospace programmes, and excellent growth across the Emerging Markets. We continue to invest in the ongoing growth of the business through capital expenditure and increased resources.

1 Headline operating profit and headline profit before taxation exclude amortisation of acquired intangibles of £1.9m (H1 2017: £2.3m) and acquisition costs of £nil (H1 2017: £nil).

2 Return on sales is defined as headline operating profit as a percentage of revenue.

3 Free cash flow is defined as cash generated by operations of £82.6m (H1 2017: £87.3m) less net capital expenditure of £31.0m (H1 2017: £29.7m), net interest paid of £0.9m (H1 2017: £1.2m), and taxation of £11.3m (H1 2017: £14.3m).

4 A detailed EPS reconciliation is provided in note 6 to this announcement.

5 At constant currency.

"While our business by its nature, has limited forward visibility, at current exchange rates, the Board expects that the full year result will be marginally ahead of current consensus6."

6 The Company compiled consensus forecast for headline operating profit (EBITA) is £135.3m.

END

A live webcast of the analysts' meeting will be available from 10.30am at www.bodycote.com and a copy of the presentation will be available on the Company's website in the investor section from 0700am.

For further information, please contact:

Bodycote plc

Stephen Harris, Group Chief Executive

Dominique Yates, Chief Financial Officer

Fiona Lawrence, Investor Relations

Tel No +44 (0)1625 505 300

FTI Consulting

Richard Mountain

Susanne Yule

Tel No +44 (0)203 727 1340

OVERVIEW

Bodycote reported revenue growth of 6.4% to £368.0m (H1 2017: £345.7m), which includes a negative impact from foreign exchange translation. At constant currency, revenue grew 8.7%.

The following review reflects constant currency growth rates unless stated otherwise.

Technologies7

The Classical Heat Treatment business contributed 77% of our total revenue and around 60% of headline operating profit in the first six months of the year. Overall Classical Heat Treatment revenue growth was 8%, supported by growth across all of our key market sectors.

Specialist Technologies contributed 23% of revenue and around 40% of headline operating profit in the first six months of the year. Specialist Technologies delivered 11% revenue growth, in line with our growth aspirations for this group of early stage technologies. Low pressure carburising (LPC) and Speciality Stainless Steel Processes (S3P), which are largely focused on automotive and general industrial markets, delivered strong growth as we rolled out additional capacity to meet customer demand and invested in expertise to continue marketing these highly differentiated processes. HIP8  Product Fabrication (HIP PF) and Surface Technology, which have both been impacted by the significant decline in oil & gas revenues in recent years, returned to growth as subsea revenue showed early signs of recovery. HIP Services growth was held back by the previously indicated decline in the large frame industrial gas turbine market.

Market sectors7

Aerospace and defence revenues grew 3.6% to £82m. Growth remains very strong in the UK, where we are delivering new capacity to meet the increased demand. The capacity shortfalls in our customer's supply chain in Continental Europe and the USA have continued throughout this period, constraining our growth.

Energy revenues grew 20.0% to £31m, benefiting from the continuing recovery in onshore North American oil & gas. Subsea revenues, which have historically been driven by our HIP PF and Surface Technology processes, are now showing some early signs of recovery. Large frame industrial gas turbine revenues are down as previously indicated.

Our automotive business continues to perform ahead of the market, delivering 9.4% revenue growth to £110m, with more than 85% of revenues coming from the car & light truck market. This performance, in a sector which is flat, builds on the double-digit revenue growth performance that we saw in 2017 and reflects the success that Bodycote has had in winning new contracts on some key platforms for the auto manufacturers. We have also benefited in our Emerging Markets business, aided by new facilities, as auto manufacturers increasingly build capacity in these rapid growth territories. We continue to invest in LPC and S3P to service our auto customers. These technologies are establishing themselves as enablers for some of the developments in auto technology, with the resultant benefit to revenue growth.

7 A review of the Company's Operating Segments is contained in the Business Review section on page 5.

8 HIP is Hot Isostatic Pressing.

General industrial revenues were 9.0% higher, growing to £145m, with particularly good growth coming from our Specialist Technologies which contributed 2.5% of the growth. We have seen good growth across all key markets and believe the recovery in the resources sector is having a secondary benefit to the general industrial market.

Investment in growth

Our facilities in Emerging Markets grew revenues at 22% with China and Mexico both delivering growth in excess of 30%. Although Emerging Market revenue only accounts for 8% of our revenue today, we have four new facilities in the early phase of revenue ramp up. We are well positioned to benefit from auto manufacturers' continued transition into these markets.

In the first half of the year we have invested £16m (more than 50% of overall capex) to support the growth of the business adding new capacity into existing facilities and developing new facilities. Typically it takes three to five years for revenues to fully mature in a new facility. Since 2015 we have either opened or have under development 12 facilities. These include three Specialist Technologies facilities, three Emerging Market facilities and one Specialist Technologies facility in an Emerging Market. Of the ten facilities that are already operational, we benefitted from a contribution of almost 2% to the overall revenue growth in the first half of this year, with further significant future revenue growth potential.

Profit and earnings improvement

Return on sales has continued to improve to 19.0% (H1 2017 17.8%). We have once again recovered the impact of cost inflation through price increases and continued to focus on cost discipline and improving operational efficiencies. At the same time, we are investing to ensure that we can continue to support future growth effectively. The Group's headline operating profit grew 14% to £70.1m (13% growth in statutory operating profit to £68.2m).

The Group's good profit improvement, coupled with a headline tax rate of 24.5% (H1 2017: 25.5%) increased basic headline earnings per share to 27.3p (H1 2017 23.6p). Basic earnings per share increased to 26.6p from 22.9p.

Dividend

The Board has declared an interim dividend of 5.7p (H1 2017 5.3p) which represents an increase of 8% over the prior year. The interim dividend will be paid on 2 November 2018 to all shareholders on the register at the close of business on 5 October 2018.

Outlook

Bodycote has enjoyed a strong first half of 2018. Robust growth has continued with double-digit revenue progression in Specialist Technologies, contract wins on automotive and aerospace programmes, and excellent growth across the Emerging Markets. We continue to invest in the ongoing growth of the business through capital expenditure and increased resources.

While our business by its nature, has limited forward visibility, at current exchange rates, the Board expects that the full year result will be marginally ahead of current consensus. 9

9 The Company compiled consensus forecast for headline operating profit (EBITA) is £135.3m.

BUSINESS REVIEW

The following review reflects constant currency growth rates unless stated otherwise.

The ADE Divisions

We have 63 ADE facilities around the world including classical heat treatment, hot isostatic pressing (HIP) and Surface Technology facilities.

Revenue for the first half of the year was £142.7m, an increase of 8.8% (4.8% at actual rates). Headline operating profit was £33.3m an increase of 13% (8% at actual rates), benefiting from positive operational leverage as revenues grew. Accordingly, return on sales improved to 23.3% (H1 2017: 22.6%). Statutory operating profit grew to £32.9m (H1 2017: £29.9m).

Net capital expenditure in the period was £11.0m (H1 2017: £10.8m), representing 1.0 times depreciation. We have invested in new HIP capacity in Europe with Belgium receiving a new HIP later this year and we have also placed an order to increase our HIP capacity in North America. In addition we commenced investment in a new UK facility to support our growing UK civil aviation business.

The AGI Divisions

Our extensive network of more than 120 AGI facilities enables the business to offer the widest range of technical capability and security of supply, while continuing to increase the proportion of technically differentiated services that it offers. Bodycote has a long and successful history of servicing this division's wide-ranging customer base.

Revenue was £225.3m, 8.6% ahead of the prior year (7.5% at actual rates). Our new facilities, including LPC and S3P facilities and those in Emerging Markets, are developing in line with expectations. Emerging Market growth was above 20%, with growth in Mexico and China over 30%. The addition of LPC capacity in Mexico for specific automotive programmes has helped drive this significant growth.

Headline operating profit was £43.2m (H1 2017: £36.9m) 17% ahead of the prior period (17% at actual rates). Return on sales expansion has been a focus for our AGI business over many years now, and, at 19.2% we delivered return on sales improvement once again (H1 2017: 17.6%). Statutory operating profit grew to £41.7m (H1 2017: £35.4m).

Net capital expenditure was £18.9m (H1 2017: £16.2m) representing 1.0 times depreciation. We are continuing to invest in the rapid growth Emerging Markets, as well as supporting new capacity for auto programmes that we have won.

FINANCIAL OVERVIEW

Group revenue was £368.0m, an increase of 6.4% at actual exchange rates and 8.7% at constant currency. Headline operating profit for the six months increased by 14% to £70.1m (H1 2017: £61.7m), and return on sales increased to 19.0% (H1 2017: 17.8%). Headline operating profit at constant currency increased by 15% to £71.2m. Once again, increases in input costs were more than recovered via price increases and the Group maintained a strong focus on cost control and operational efficiency. Statutory operating profit grew to £68.2m (H1 2017: £59.4m).

Finance charge

The net finance charge was £1.0m compared to £1.2m in H1 2017.

As at 30 June 2018, the Group's £230m Revolving Credit Facility was drawn by £20m. It has a remaining life of 3 years and 10 months. 

Taxation

The tax charge in the first half of 2018 was £16.4m, compared to a charge of £14.6m for the same period of 2017. The effective tax rate was 24.5% (H1 2017: 25.1%), representing an improvement on previous guidance of 26.5% as the Group benefits from the utilisation of some historic losses.

The headline tax rate, being stated after accounting for amortisation of goodwill and acquired intangibles, is 24.5% in the first six months of 2018 (H1 2017: 25.5%).

The final impact of the changes from the passing of the Tax Cuts and Jobs Act in the US in December 2017 are subject to a number of detailed provisions in the legislation and any implementation guidance issued by the Treasury Department and the IRS. The exact workings of these provisions remains unclear. Bodycote will continue to monitor any developments and give due consideration to the impact of any guidance, along with ongoing market interpretation and assessment on the accounting implications of this Act.

Nonetheless, we have revised guidance as we do not anticipate that the Group's headline tax rate for the full year will exceed 24.5%. 

Earnings per share

Basic headline earnings per share from operations for the half year were 27.3p (H1 2017: 23.6p). Basic earnings per share from operations for the half year were 26.6p (H1 2017: 22.9p). Diluted earnings per share were 26.6p (H1 2017: 22.9p).

Cash flow

1 Earnings before interest, tax, depreciation, amortisation, impairment, profit or loss on disposal of property, plant and equipment and share-based payments.

2 Free cash flow is defined as cash from operating activities of £82.6m (H1 2017: £87.3m) less net capital expenditure of £31.0m (H1 2017: £29.7m). interest paid of £0.9m (H1 2017: £1.2m), and taxation of £11.3m (H1 2017: £14.3m).

Free cash flow for the period was £39.4m compared to £42.1m in the first six months of 2017. The decrease is mainly a result of a larger net working capital outflow which amounted to £17.8m. This reflects two key items. Firstly, there is a £11m seasonal outflow on trade receivables reflecting the fact that higher revenues in June result in higher outstanding receivables than in December. Secondly, bonuses are paid during the first half of the year, and the working capital outflow associated with these payments was £7m. In 2017, this was actually an inflow as the 2016 bonuses paid in the first half of 2017 were lower than those accrued for the first half of 2017.

The utilisation of restructuring provisions resulted in a cash outflow of £2.1m (H1 2017: £2.3m).

Income taxes paid during the first six months at £11.3m were £3.0m less than the same period last year due to lower tax payments in the US in the first half of the year. 

The Group's headline operating cash flow decreased to £53.7m (H1 2017: £59.9m), as higher EBITDA was offset by the difference in working capital movements, explained above. In June, £70.5m was paid out to shareholders for the 2017 special and final ordinary dividends (H1 2017: £20.5m) leaving the Group with closing net cash of £5.6m (30 June 2017: £17.7m).

Capital Expenditure

Net capital expenditure (capital expenditure less proceeds from asset disposals) for the period was £31.0m (H1 2017: £29.1m). The multiple of net capital expenditure to depreciation was 1.0 times (H1 2017: 1.0 times). Slightly more than half of the capital expenditure was on growth investment projects, including investment in incremental capacity for Specialist Technologies (notably HIP Services, S3P and LPC), expenditure on several new facilities and investments in capacity and technology expansion in a number of existing locations.

The Group continues to invest in maintaining its assets to a high quality.

Net debt

Group net cash at 30 June 2018 was £5.6m (31 December 2017 net cash: £39.6m and 30 June 2017 net cash: £17.7m), after payment of ordinary and special dividends to the value of £70.5m during the first half. As at 30 June 2018 £20m was drawn under the committed facilities, compared to nil at 31 December 2017 and 30 June 2017. The Group continues to be able to borrow at competitive rates and therefore currently deems this to be the most effective means of funding.

Principal risks and uncertainties

The directors have reconsidered the principal risks and uncertainties of the Group. The directors do not consider that the principal risks and uncertainties of the Group have significantly changed since the publication of the Annual Report for the year ended 31 December 2017. The risks and associated risk management processes, including financial risks, can be found on pages 25-29, 115 and 116 of the 2017 Annual Report, which is available at www.bodycote.com. The risks referred to and which could have a material impact on the Group's performance for the remainder of the current financial year relate to:

· Markets;

· Loss of key customers;

· Competitor action;

· Safety and health;

· Environment;

· Service quality;

· Major disruption at a facility;

· Capital projects;

· Information Technology;

· Regulatory and legislative compliance;

· Liquidity;

· Interest rate fluctuation; and

· Currency exchange rate fluctuation.

Going Concern

As stated in note 1 to the condensed financial statements, the directors have formed a judgement, at the time of approving the condensed financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the condensed financial statements.

Responsibility statement

We confirm to the best of our knowledge:

(a) the condensed consolidated set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

(b) the Interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the Interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board,

Cautionary statement

This Interim management report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The Interim management report should not be relied on by any other party or for any other purpose.

The Interim management report contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Unaudited condensed consolidated income statement

All activities have arisen from continuing operations.

Unaudited condensed consolidated statement of comprehensive income

Unaudited condensed consolidated balance sheet

Unaudited condensed consolidated cash flow statement

Unaudited condensed consolidated statement of changes in equity

Included in other reserves is the capital redemption reserve arising on redemption of the Group's B shares of £129.8m (2017: £129.8m) and the share-based payment reserve of £9.0m (2017: £5.3m).

Notes to the condensed consolidated financial information

1. Accounting policies

Basis of preparation

This condensed set of financial statements for the half year ended 30 June 2018 has been prepared in accordance with IAS 34 Interim Financial Reporting.

The Interim management report has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRSs) as adopted by the European Union and in accordance with those disclosed in the Annual Report for the year ended 31 December 2017, which was filed with the Registrar of Companies on 19 June 2018.

Going concern

In determining the basis of preparation for the Interim management report, the directors have considered the Group's business activities, together with the factors likely to affect its future development, performance and position which are set out in the Financial overview. This includes an overview of the Group's financial position, cash flows, liquidity position and borrowing facilities.

The Group meets its working capital requirements through a combination of committed and uncommitted facilities and overdrafts. The overdrafts and uncommitted facilities are repayable on demand but the committed facilities are due for renewal as set out below. There is sufficient headroom in the committed facility covenants to assume that these facilities can be operated as contracted for the foreseeable future.

On 3 April 2017, the Group extended the £230m Revolving Credit Facility for five years to April 2022. The committed facilities as at 30 June 2018 were as follows:

· £230m Revolving Credit Facility maturing 3 April 2022

The Group's forecasts and projections, which cover a period of at least 12 months from the date of approval of this Interim management report, taking account of reasonable potential changes in trading performance, show that the Group should be able to operate within the level of its current committed facilities.

The directors have reviewed forecasts and projections for the Group's markets and services, assessing the committed facility and financial covenant headroom, central liquidity and the Group's ability to access further funding. The directors also reviewed downside sensitivity analysis over the forecast period, thereby taking into account the uncertainties arising from the current economic environment. Following this review, the directors have formed a judgement, at the time of approving the condensed financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the condensed financial statements.

Changes in accounting policies

As at 1 January 2018, the Group adopted IFRS 9 'Financial instruments' and IFRS 15 'Revenue from contracts with customers'. Apart from these standards, the same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

No new or revised standards adopted in the current period have had a material impact on the Group's financial statements.

2. Alternative performance measures (APMs)

Bodycote uses various APMs, in addition to those reported under IFRS, as management believe these measures enable users of the financial statements to assess the underlying trading performance of the business. The APMs used include headline operating profit, headline profit before taxation, EBITDA, headline EBITDA, headline earnings per share (EPS), headline operating cash flow, free cash flow and net cash. These measures reflect the underlying performance of the business as they exclude the impact of amortisation of acquired intangible assets and exceptional items. The Group also uses revenue growth percentages adjusted for the impact of foreign exchange movements, where appropriate, to better represent the underlying performance of the business. The measures described above are also used in the targeting process for executive and management annual bonuses (headline operating profit, operating cash-flow) and share schemes (headline operating profit, headline operating cash flow, headline EPS).

The constant exchange rate comparison uses the current year reported segmental information, stated in the relevant functional currency, and translates the results into its presentational currency using the prior year's monthly exchange rates.

APMs are defined and reconciled to the IFRS statutory measure as follows:

Headline operating profit

Headline profit before taxation

EBITDA and Headline EBITDA (Earnings Before Interest, Taxation, Depreciation, and Amortisation)

Headline earnings per share

A detailed reconciliation is provided in note 6 to this announcement

Headline operating cash flow

Free cash flow 

Net Cash

Revenue and headline operating profit at constant exchange rates

Reconciled to revenue and headline operating profit in the table below.

3. Business and geographical segments

The Group has 187 locations across the world serving a range of market sectors with various thermal processing services. The range and type of services offered is common to all market sectors.

In accordance with IFRS 8 Operating Segments, the segmentation of Group activity reflects the way the Group is managed by the chief operating decision maker, being the Group Chief Executive, who on a monthly basis reviews the operating performance of six operating segments, split between the Aerospace, Defence & Energy (ADE) and Automotive & General Industrial (AGI) business areas, as follows:

· ADE - Western Europe;

· ADE - North America;

· ADE - Emerging markets;

· AGI - Western Europe;

· AGI - North America; and

· AGI - Emerging markets.

The split of operating segments by geography reflects the divisional reporting structure of the Group.

In accordance with the aggregation criteria of IFRS 8, the operating segments are aggregated into the Group's two key business areas, ADE and AGI, the split being driven by customer behaviour and requirements. Customers in the ADE segment tend to operate and purchase more globally and have long supply chains, whilst customers in the AGI segment tend to purchase more locally and have shorter supply chains.

Bodycote plants do not exclusively supply services to customers of a given market sector. The allocation of plants between ADE and AGI is therefore derived by reference to the preponderance of markets served.

Inter-segment sales are not material.

The Group does not rely on any individual major customers.

3. Business and geographical segments (continued)

3. Business and geographical segments (continued)