Bodycote PLC Results for the six months to 30 June 2019 (6455G)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Bodycote Plc	LSE:BOY	London	Ordinary Share	GB00B3FLWH99	ORD 17 3/11P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-7.00	-1.16%	599.00	600.00	601.00	608.00	597.00	597.00	336,097	16:35:08

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Metalworking Machinery, Nec	802.5M	85.6M	0.4583	13.09	1.13B

Bodycote (LSE:BOY)
Historical Stock Chart

From Mar 2020 to Mar 2025

TIDMBOY

RNS Number : 6455G

Bodycote PLC

25 July 2019

Bodycote plc

Results for the six months to 30 June 2019

Resilient performance; full year outlook unchanged

Financial highlights

 
                                                Restated(1) 
                                     Half year    Half year 
                                            to           to             % Change 
                                       30 June      30 June             Constant 
                                          2019         2018  % Change   Currency 
Revenue                              GBP366.5m    GBP368.0m     -0.4%      -1.5% 
-----------------------------------  ---------  -----------  --------  --------- 
Headline operating profit(2)          GBP66.9m     GBP71.0m       -6%        -7% 
-----------------------------------  ---------  -----------  --------  --------- 
Return on sales(3)                       18.3%        19.3% 
-----------------------------------  ---------  -----------  --------  --------- 
Headline profit before taxation(2)    GBP64.7m     GBP68.9m       -6%        -6% 
-----------------------------------  ---------  -----------  --------  --------- 
Free cash flow(3)                     GBP44.6m     GBP51.0m      -12% 
-----------------------------------  ---------  -----------  --------  --------- 
Basic headline earnings per 
 share(4)                                25.6p        27.2p       -6% 
-----------------------------------  ---------  -----------  --------  --------- 
Interim dividend per share                6.0p         5.7p      5.3% 
-----------------------------------  ---------  -----------  --------  ---------

Statutory results

 
                                      Restated(1) 
                           Half year    Half year 
                                  to           to 
                             30 June      30 June 
                                2019         2018 
Operating profit            GBP64.4m     GBP69.1m 
-------------------------  ---------  ----------- 
Profit before taxation      GBP62.2m     GBP67.0m 
-------------------------  ---------  ----------- 
Basic earnings per share       24.7p        26.5p 
-------------------------  ---------  -----------

Highlights

   --    Civil aviation revenue growth of 21%(5) 
   --    Specialist Technologies' revenue growth of 4%(5) 
   --    Emerging markets revenue growth of 3%(5) 
   --    Western Europe car & light trucks' revenues decline 16%(5) 
   --    Resilient 18.3% return on sales performance 
   --    GBP38m invested to support growth of the business, including two acquisitions 
   --    Interim dividend of 6.0p, up 5.3%

Commenting, Stephen Harris, Group Chief Executive said:

'Bodycote delivered a resilient set of results in the face of challenging automotive and general industrial markets. The strong performance in civil aviation is expected to continue and provides a solid footing for the second half. The return on sales, at 18.3%, demonstrates the ability of the Group to adapt effectively to changes in business conditions.

While trading conditions deteriorated in the second quarter, a number of areas of the Group's business remain strong and comparatives in the second half become easier. The Board's expectations for the full year remain unchanged.'

1 The Group adopted IFRS 16 Leases effective for accounting periods beginning on or after 1 January 2019 using the full retrospective approach. Consequently, prior periods have been restated to reflect IFRS 16 implementation. Further details are disclosed in note 10 of the condensed consolidated financial statements.

2 The headline performance measures represent the statutory results excluding certain non-operational items. These are deemed alternative performance measures under the European Securities and Markets Authority guidelines. Please refer to note 2 to the financial statements on page 13 for a reconciliation to the IFRS equivalent.

3 A detailed reconciliation is provided in note 2 on page 13.

4 A detailed reconciliation is provided in note 6 on page 20.

5 At constant currency.

A live webcast of the analysts' meeting will be available from 8.45am at www.bodycote.com and a copy of the presentation will be available on the Company's website in the investor section from 25th July.

For further information, please contact:

Bodycote plc

Stephen Harris, Group Chief Executive

Dominique Yates, Chief Financial Officer

Tel No +44 (0)1625 505 300

FTI Consulting

Richard Mountain

Susanne Yule

Tel No +44 (0)203 727 1340

Overview

Bodycote reported a decline in revenue of 0.4% to GBP366.5m (H1 2018: GBP368.0m). At constant currency, revenue declined 1.6%.

Headline operating profit declined 6% to GBP66.9m. Return on sales was robust at 18.3% (H1 2018: 19.3%) despite high inflationary pressure from labour and utility costs. Statutory operating profit declined 7% to GBP64.4m.

This is a resilient set of results with good growth in specific markets, combined with focused operational management largely mitigating challenging market conditions in automotive and general industrial, and strong comparatives in 2018.

The following reflects constant currency growth rates unless stated otherwise.

Market sectors

Automotive revenues declined 8% in the first half to GBP103m. The decline was particularly accentuated in Western Europe, where car and light truck revenues fell 16% against strong comparatives from the first half of 2018 (as manufacturers accelerated deliveries ahead of the introduction of the Worldwide Harmonised Light Vehicles Test Procedure (WLTP) regulations).

General Industrial revenues declined 7% to GBP136m, in part due to the revenue impact of businesses that were discontinued in the second half of 2018. Excluding this impact and the positive impact from last year's acquisition, organic General Industrial revenues declined 6%. It is apparent that customers are delaying capital investment decisions in light of the prevailing uncertainty surrounding macroeconomic growth and trading conditions.

Western European oil and gas revenues grew strongly in the subsea segment. However, this was offset by weakness in North American onshore oil and gas business as specific customers lost market share. Industrial Gas Turbine (IGT) revenues continued to decline so that, in aggregate, Energy revenues were 2% lower at GBP31m.

Aerospace and Defence revenues grew 16% to GBP97m, with good growth in all key markets. Growth in the United States was particularly strong. Civil aviation revenues grew 21% following the strong pick-up that we saw in the second half of 2018, largely driven by growth in content and volume of LEAP engines.

Specialist Technologies and Emerging Markets

Specialist Technologies' revenues, accounting for 25% of the Group's revenues, grew 4%. HIP Services performed well in civil aviation, while Powdermet(R) grew well in subsea applications. The order book for Powdermet(R) continues to grow apace in subsea with prospects in aerospace starting to show significant promise.

LPC was adversely affected by the cancellation of an automotive programme in Western Europe that had been destined for the Chinese market. In addition, a significant piece of business was lost in S(3) P(R) as a result of a product change by a major customer. The rest of the S(3) P(R) business continues to grow well and further capacity expansion is being brought on stream.

Emerging markets' revenues grew 3% during the period, which is lower than we have seen over previous years. Much of the emerging markets business is in automotive. Eastern Europe softened as German manufacturers favoured their domestic production facilities over facilities in Eastern Europe, which are more easily flexed. Activity in China slowed and Mexico stalled in the second quarter amid cross border trade uncertainty.

Investment in growth

During the first half, we invested GBP38m across the business to support future growth. This included GBP23m spent on acquiring two bolt-on businesses in June. One of these is in Scandinavia and focuses on mining. The other is in Slovakia, which represents a new country for Bodycote in our emerging markets. Both fit well into our network of existing facilities.

Our new greenfield facilities, focused on supporting our strategic growth priorities, continue to ramp up their revenues as they mature. During the first half, a new facility in the Czech Republic opened and we are progressing well with a new facility in Hungary, which should become operational in 2020. We also made progress on new facilities in Illinois and upstate New York (USA).

Additional HIP capacity in Europe came on stream during the first half and will support growth in the second half of the year. We also continue to invest in additional HIP capacity in North America, which should become operational during 2020.

Profits and earnings

We continued to experience higher input cost inflation in most markets, with pressure coming from wage increases, as well as higher utility costs. Price increases and active management of costs once again enabled us to cover the impact of the cost increases.

Overall volumes declined. Significant increases in certain sectors, such as civil aviation, were more than offset by declines in other sectors, including the Western European automotive and general industrial markets in particular. Nonetheless, the 18.3% return on sales achieved in the period represents a very resilient performance in light of the challenges that the business has faced, and demonstrates once again the ability of the business to quickly adapt and adjust its cost base as business conditions change.

At 24.4%, the Group's headline tax rate is in line with guidance and similar to last year's rate (H1 2018: 24.5%). As a result, basic headline earnings per share were 25.6p (H1 2018: 27.2p). Basic earnings per share were 24.7p (H1 2018: 26.5p).

Strategic progress

The focus areas for growth of the business, namely civil aviation, Specialist Technologies and Emerging Markets, all grew revenues, representing a continued return on the investments that we have made to support profitable growth in these areas. Growth should be further supported by additional capacity in the second half.

Bolt-on acquisitions remain another key pillar of our growth strategy and we were pleased to complete two acquisitions during the period, which further strengthen our network and service offerings.

Dividend

The Board has declared an interim dividend of 6.0p (H1 2018: 5.7p), which represents an increase of 5.3% over the prior year. The interim dividend will be paid on 8 November 2019 to all shareholders on the register at the close of business on 11 October 2019.

The Group has become aware of an issue concerning technical compliance with the Companies Act 2006 in respect of the payment of the 2018 special dividend. The Group had not lodged interim accounts with Companies House to show that the dividend was supported by sufficient distributable reserves. The Group's historical reported trading results and financial condition are entirely unaffected, but the Group proposes to put a resolution to shareholders at its next general meeting to address this issue.

Summary and outlook

Bodycote has delivered a resilient set of results in the face of challenging automotive and general industrial markets. The strong performance in civil aviation is expected to continue and provides a solid footing for the second half. The return on sales, at 18.3%, demonstrates the ability of the Group to adapt effectively to changes in business conditions.

While certain trading conditions have deteriorated in the second quarter, a number of areas of the Group's business remain strong and comparatives in the second half become easier. The Board's expectations for the full year remain unchanged.

Business review

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

The ADE divisions

We have 64 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 GBP151.1m, an increase of 3% (6% at actual rates), benefiting from very strong growth in civil aviation revenues, but growth was tempered by the fact that almost a quarter of revenues from our ADE facilities support revenues in the automotive and general industrial market sectors. Revenue growth was also held back by the impact of discontinued businesses. Headline operating profit was GBP37.9m, an increase of 10% (13% at actual rates), benefiting from positive operational leverage as revenues grew. Accordingly, return on sales improved to 25.1% (H1 2018: 23.5%). Statutory operating profit grew to GBP37.4m (H1 2018: GBP33.2m).

Net capital expenditure in the period was GBP11.1m (H1 2018: GBP11.0m), representing 0.8 times depreciation (H1 2018: 1.0 times). Investment behind our growth is ongoing, particularly in support of our Specialist Technologies.

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 to the divisions' wide-ranging customer base.

Revenue was GBP215.4m, 5% lower than last year (4% at actual rates). This decline is predominantly due to an 8% decline in revenues in Western Europe (9% at actual rates).

Headline operating profit was GBP35.4m (H1 2018: GBP43.7m), while return on sales declined to 16.4% (H1 2018: 19.4%). The significant volume decline in Western Europe was entirely responsible for the decline in headline operating profit and in return on sales. Activity is ongoing to

mitigate the impact of this volume downturn on the profitability of the business.

Net capital expenditure was GBP16.4m (H1 2018: GBP18.9m), representing 0.7 times depreciation. We continue to invest behind profitable programmes which will deliver growth and margin improvements, as well as value-adding bolt-on acquisitions.

Financial overview

 
                                                     Half year to 30 June 
                                                   ---------------------- 
                                                                 Restated 
                                                        2019         2018 
                                                        GBPm         GBPm 
Revenue                                                366.5        368.0 
-------------------------------------------------  ---------  ----------- 
Headline operating profit                               66.9         71.0 
Amortisation of acquired intangible fixed assets       (2.1)        (1.9) 
Acquisition costs                                      (0.4)            - 
-------------------------------------------------  ---------  ----------- 
Operating profit                                        64.4         69.1 
Net finance charge                                     (2.2)        (2.1) 
-------------------------------------------------  ---------  ----------- 
Profit before taxation                                  62.2         67.0 
Taxation                                              (15.2)       (16.4) 
-------------------------------------------------  ---------  ----------- 
Profit for the period                                   47.0         50.6 
-------------------------------------------------  ---------  -----------

The 2018 figures in the above table have been restated for the impact of IFRS 16. This had the effect in 2018 of adding GBP0.9m to headline operating profit, with an offsetting GBP1.1m increase in finance costs, leaving statutory profit before taxation marginally lower at GBP67.0m.

Group revenue in the first half of 2019 was GBP366.5m, a decrease of 0.4% at actual rates (1.5% at constant currency). Headline operating profit for the six months decreased by 6% to GBP66.9m (H1 2018: GBP71.0m). Consequently, return on sales declined to 18.3% (H1 2018: 19.3%), largely as a result of the negative operating gearing impact from lower revenues in the Group's Western Europe AGI business. Statutory operating profit fell to GBP64.4m (H1 2018: GBP69.1m).

Finance charge

The net finance charge was GBP2.2m (H1 2018: GBP2.1m).

At 30 June 2019, the Group's GBP230m Revolving Credit Facility was drawn by GBP30m (H1 2018: GBP20m). It has a remaining life of 2 years and 10 months.

Taxation

The tax charge in the first half of 2019 was GBP15.2m, compared with a tax charge of GBP16.4m for the same period in 2018. The effective tax rate was 24.5% (H1 2018: 24.5%).

The headline tax rate, being stated after accounting for amortisation of acquired intangibles and acquisition costs, was 24.4%, in line with previous guidance.

On April 25, the European Commission released its decision that certain tax exemptions offered by the UK authorities constituted State Aid and, as such, will need to be recovered. The UK government has subsequently appealed against this decision. At this stage, we have not made any provision against this contingent liability. More details can be found in note 13 on page 23.

Earnings per share

Basic headline earnings per share for the half year were 25.6p (H1 2018: 27.2p). Diluted statutory earnings per share were 24.7p (H1 2018: 26.5p).

Cash flow

 
                                                 Half Year to        Half Year to             Year end 
GBPm                                             30 June 2019        30 June 2018     31 December 2018 
-----------------------------------------  ------------------  ------------------  ------------------- 
                                               Post       Pre      Post       Pre       Post       Pre 
                                            IFRS 16   IFRS 16   IFRS 16   IFRS 16    IFRS 16   IFRS 16 
Headline operating profit                      66.9      65.7      71.0      70.1      140.7     138.3 
Depreciation and amortisation                  39.0      31.7      36.9      29.7       76.4      62.0 
Impairment of fixed assets                        -         -       0.4       0.4        1.8       1.8 
Income from associates                        (0.2)     (0.2)         -         -          -         - 
Loss on disposal of business                      -         -         -         -        0.6       0.6 
Profit on disposal of fixed assets                -         -         -         -      (1.7)     (1.8) 
-----------------------------------------  --------  --------  --------  --------  ---------  -------- 
Headline EBITDA                               105.7      97.2     108.3     100.2      217.8     200.9 
Net maintenance capital expenditure          (32.7)    (25.1)    (23.4)    (14.4)     (48.7)    (29.8) 
Net working capital movement                 (13.3)    (13.3)    (18.5)    (18.5)      (3.7)     (3.7) 
-----------------------------------------  --------  --------  --------  --------  ---------  -------- 
Headline operating cash flow                   59.7      58.8      66.4      67.3      165.4     167.4 
Restructuring                                 (1.2)     (1.2)     (2.1)     (2.1)      (2.8)     (2.8) 
Financing costs                               (2.1)     (0.9)     (2.0)     (0.8)      (4.3)     (1.9) 
Tax                                          (11.8)    (11.8)    (11.3)    (11.3)     (24.5)    (24.5) 
-----------------------------------------  --------  --------  --------  --------  ---------  -------- 
Free cash flow                                 44.6      44.9      51.0      53.1      133.8     138.2 
Expansionary capital expenditure             (15.6)    (15.6)    (15.9)    (15.9)     (44.1)    (44.1) 
Ordinary dividend                            (25.2)    (25.2)    (23.0)    (23.0)     (34.3)    (34.3) 
Acquisition spend                            (28.6)    (22.7)     (1.3)     (1.3)      (8.8)     (8.8) 
Special dividend                             (38.1)    (38.1)    (47.5)    (47.5)     (47.5)    (47.5)

Own shares purchased less SBP and others      (4.8)     (5.0)       0.9       0.9      (6.7)     (6.6) 
(Reduction)/increase in net cash             (67.7)    (61.7)    (35.8)    (33.7)      (7.6)     (3.1) 
Opening net cash/(debt)                      (44.1)      36.2    (34.8)      39.6     (34.8)      39.6 
Foreign exchange movements                        -         -     (0.2)     (0.3)      (1.7)     (0.3) 
-----------------------------------------  --------  --------  --------  --------  ---------  -------- 
Closing net cash/(debt)                     (111.8)    (25.5)    (70.8)       5.6     (44.1)      36.2 
-----------------------------------------  --------  --------  --------  --------  ---------  --------

The introduction of IFRS 16 has resulted in some changes to the management cash flow. The key impact of IFRS 16 is that depreciation increases, thereby increasing EBITDA, whilst, in order to be able to reconcile the cash flows to the relevant net cash/debt movements, we have treated lease additions and extensions as a form of capital expenditure outlay.

For ease of reference, we have shown both the pre and post IFRS 16 cash flows for both years in the table above.

We have also taken the opportunity to make some other changes to the cash flow. The key change is to distinguish maintenance (stay in business) capital expenditure, which is required for the operations to continue to run smoothly, from expansionary capital expenditure, which is discretionary in nature. Expansionary capital expenditure is, therefore, no longer deducted from free cash flow. We have also taken the logical steps of combining acquisition costs with the acquisition consideration and combining the share-based payments add back with the cash outlay to purchase our own shares (given that we settle share-based payments by buying shares in the market).

As a result, free cash flow in the six-month period was GBP44.6m compared with GBP51.0m in the corresponding period. The decrease reflects an increase in maintenance capital expenditure, which is mainly down to timing of payments in the first half.

Net debt

Group net debt excluding lease liabilities was GBP25.5m (H1 2018: GBP5.6m), having spent GBP22.7m on acquisitions in the first half. Group net debt (including lease liabilities) at 30 June 2018 was GBP111.8m (H1 2018: GBP70.8m and 31 December 2018: GBP44.1m). The first half increase in debt versus 31 December 2018 reflects the payment of ordinary and special dividends totalling GBP63.3m, as well as GBP15.6m spent on expansionary capital expenditure, GBP20.0m net consideration on acquisitions and a net outlay of GBP4.7m related to share purchases for future settlement of long-term incentives.

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 2018. The risks and associated risk management processes, including financial risks, can be found on pages 29-33, 115 and 116 of the 2018 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 projects; and

-- Regulatory and legislative compliance.

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,

   S.C. Harris                              D. Yates 
   Group Chief Executive          Chief Financial Officer 
   25 July 2019                           25 July 2019

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.