Bodycote : 2021 Preliminary Results

2021 Results Press Release

Monday, 14 March 2021

Circulation: RNS formatted

www.bodycote.com

Bodycote plc

Full year results for year ended 31 December 2021

'Good progress in 2021, well positioned as revenues grow'

Financial summary

					% Change	%
	2021				Constant	Change
		2020		Currency
Revenue	£615.8	m	£598.0	m	7.1%	3.0%
Headline operating profit1	£94.8	m	£75.3	m	32%	26%
Headline operating margin1	15.4	%	12.6	%
Exceptional items2	-	m	£(58.4)	m
Free cash flow1	£105.0	m	£106.1	m		-1%
Basic headline earnings per share1,3	35.8	p	27.8	p	34%	29%
Ordinary dividend per share	20.0	p	19.4	p
Return on capital employed1	12.0	%	9.8	%

Additional statutory measures

	2021		2020
Operating profit	£83.8	m	£5.0	m
Profit after tax	£60.0	m	£0.8	m
Net cash from operating activities	£144.3	m	£139.1	m
Basic earnings per share	31.2	p	0.2	p

Highlights

Results

• Revenues up 7.1% at constant currency to £615.8m (organic revenues up 5.2%)
• Headline operating margin at 15.4% (2020: 12.6%)
• Free cash flow of £105m
• Closing net debt1 of £52m
• Final ordinary dividend 13.8p, total year 20.0p (2020: 19.4p)

Strategic Progress

• 2020 restructuring programme completed, with permanent cost savings of £20m delivered in 2021
• Incremental £10m of permanent cost savings to come in 2022
• Emerging Markets' revenues up 17% at constant currency
• Specialist Technologies' revenues up 7%4, outperforming Classical Heat Treatment
• Strong margin improvement anticipated as revenues grow

Commenting, Stephen Harris, Group Chief Executive said:

"We saw good progress in 2021, with margins increasing to 15.4%, as Bodycote benefited from strong recovery in general industrial markets and completion of the restructuring programme. The results also highlight the progress we are making in our strategic focus areas.

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"As we moved into 2022, General Industrial continued to perform strongly, and Civil Aerospace growth has accelerated. Bodycote's Automotive business continued to be impacted by supply chain disruption for our customers, but signs of improvement are evident. And while we expect cost inflation to persist, we will continue to manage its impact on the business. In summary, the Board expects further progress in 2022, but remains mindful of the current geo-political and macro-economic landscape.

"Looking further ahead, the outlook for the business remains positive as we benefit from high profit drop through on revenue growth across all our market sectors."

1. The headline performance measures represent the statutory results excluding certain non-operational items. Net debt excludes lease liabilities. These are deemed alternative performance measures under the Financial Reporting Council (FRC) guidelines. Please refer to the full-year results press release for a reconciliation to the nearest IFRS equivalent.
2. Detail of exceptional items is provided in note 3.
3. A detailed earnings per share reconciliation is provided in note 6.
4. At constant currency.

END

Full Year Results Presentation

Bodycote will be presenting our results via webcast at 09.00am UK GMT on 14 March 2022. Please find the following instructions to connect to the video and audio:

Webcast URL:

https://www.bodycote.com/results-webcast-2021

For dial-in only:

Participant dial-in numbers are:

United Kingdom: 0800 640 6441

UK local: 0203 936 2999

All other locations: [phone]

Participant Access Code: 617409

This presentation will be available at www.bodycote.com

For further information, please contact:

Bodycote plc

Stephen Harris, Group Chief Executive

Dominique Yates, Chief Financial Officer

Tel: [phone]

FTI Consulting

Richard Mountain

Susanne Yule

Tel: [phone]

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Full Year Commentary

Overview

Bodycote achieved £615.8m overall revenues, an increase of 7.1% at constant currency (up 3.0% at actual currency). This included a full year revenue contribution from the Ellison acquisition. Organic constant currency revenues increased 5.2%.

Headline operating profit increased to £94.8m from £75.3m in 2020, notwithstanding a £4.4m foreign exchange translation headwind. Headline operating margin recovered to 15.4% (2020: 12.6%).

Statutory operating profit increased from £5.0m to £83.8m (2020's result included a £58.4m exceptional charge).

The Group again delivered strong free cash flow of £105.0m, with free cash flow conversion of 111%. The balance sheet remains healthy, with closing net debt excluding lease liabilities of £51.9m, after having settled the remaining £57.8m of consideration for the Ellison acquisition, as well as having paid £49.0m in ordinary dividends during the year.

Basic headline earnings per share for the Group was 35.8p (2020: 27.8p). Basic earnings per share was 31.2p

(2020: 0.2p), reflecting the increase in statutory operating profit.

The following reflects constant currency growth rates versus the comparable period last year, unless stated otherwise.

Market sectors

General Industrial revenues increased 14% to £254m, with robust recovery through the year. Organic general industrial revenues in the second half of the year were 5% ahead of 2019's revenues. This growth was initially driven by recovery in customers' operating expenditure as production lines were restarted, as well as some restocking in specific sub sectors. Towards the end of the year, sub sectors that are driven by customers' capital expenditure started to improve. This is particularly encouraging, as the capital goods cycle is typically quite robust and long-lasting.

Automotive revenues increased 9% in the year, to £168m. Automotive revenues were 13% below 2019 pre- pandemic levels, which is disappointing. However, heavy truck was relatively strong. The well-publicised supply chain disruptions and chip shortages affected most of our car & light truck customers during the year. This has continued into 2022, although we are seeing evidence that these issues are starting to abate. Once our customers' supply chains stabilise, we would expect revenues and margins to grow strongly in this sector and margins will achieve levels well above those seen in 2019. This is particularly the case in our strategic focus areas of emerging markets and electric vehicles.

Aerospace & Defence revenues were 1% lower than the prior year. Taking account of the full year contribution from the Ellison acquisition, organic revenues were down 7%, and 34% below 2019 levels. The rate of narrow- body plane build is ramping up substantially and is expected to increase further through 2022 and beyond. Indeed, our Civil Aerospace revenues were up 37% in the fourth quarter. This is particularly important for Bodycote where our narrow-body focus has increased our share of content on these planes significantly over the last 5 years. While wide-body plane build is largely static, our wide-body revenues were particularly strong, primarily in the UK where Q4 revenues showed good improvement, driven by increased flying hours and overhaul programmes. Substantial levels of inventory were in place in the aerospace supply chains at the onset of the COVID-19 pandemic and while this inventory has been reducing through the year there is still excess inventory in parts of the supply chains coming into 2022. As this excess inventory is utilised and the rate of plane build increases in the coming years we would expect to see revenue growth accelerate further,

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accompanied by strong margin and profit growth. It is worth noting that at this point there is no evidence of any supply chain disruptions affecting this sector.

Energy revenues represent some 8% of Bodycote's entire business, at £47m. In 2021, Energy experienced a decline of 4%. Industrial Gas Turbines (IGT) revenues grew, while subsea orders softened after a strong 2020. Lead times on subsea projects are longer and there is normally a lag in subsea activity when compared with underlying oil and gas price movements. Non-fossil fuel power generation experienced a modest decline.

Specialist Technologies

Expanding Specialist Technologies activities is a key strategic focus for Bodycote. These technologies are differentiated, early stage processes with high margins, large market opportunities and good growth prospects. Bodycote is either the clear market leader or one of the top players among few competitors. These technologies address multiple market sectors. We continue to invest in these technologies organically, in both capital and people, and through acquisitions. Specialist Technologies' revenues increased 13% to £184m in 2021, boosted by the full year contribution from the Ellison acquisition. Organic Specialist Technologies' revenues increased 7%. Bodycote's AGI focused Specialist Technologies' revenues grew 22% during the year, which compares favourably with the 9% increase in the combined AGI Classical Heat Treatment revenues. Bodycote's ADE focused Specialist Technologies' revenues declined 2% organically during the year, outperforming the 4% decline in the comparable organic ADE Classical Heat Treatment revenues. Specialist Technologies' revenues constituted 30% of Bodycote's revenues in the year and 42% of headline operating profit.

Emerging Markets

Investment in Emerging Markets (12% of Group revenues) continues to be a strategic priority. Our Emerging Market footprint comprises Eastern Europe, China and Mexico. Emerging Market's revenues grew 17% in the year, despite a decline in our Automotive revenues in Mexico which are largely dependent on developments in the US car & light trucks market. Automotive revenues were up 20% elsewhere. General Industrial revenues were up 30% across the emerging markets.

Restructuring

The Group embarked on a strategic restructuring plan in January 2020 and expanded it significantly post the March onset of the pandemic. The plan was aimed at repositioning the Group to better focus on our strategic growth areas as well as permanently eliminating cost. The restructuring programme has been successfully completed. As part of the plan 26 plants were closed and five new ones were opened (two already opened in 2020, and three opened in 2021).

The restructuring programme has generated a total of £30m in permanent cost savings, with £20m benefitting 2021 and an additional £10m of benefit in 2022.

As part of the restructuring, virtually all the productive assets have been retained and relocated to facilities that can make better use of them. These are predominantly in higher growth markets and geographies. A large number of customers have also been transferred. The result is that Bodycote has significant production capacity available not only to service the revenue recovery that has started across a number of our markets, but also to accommodate a significant amount of further growth.

Cost inflation

The Group saw inflationary pressure build through the year, most notably in energy costs during the second half. We are, once again, ensuring that cost inflation is passed on to customers. Indeed, Bodycote has achieved this year in, year out for more than 10 years.

Cost inflation principally impacts us through increases in energy prices (historically c. 10% of revenues) and labour costs (c. 40% of revenues). In a volatile inflationary environment, energy cost increases are passed on

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through customer surcharges or contractual indexation. In contrast, labour inflation is addressed by price increases or contractual indexation. Surcharges and price increases typically take effect in one to three months. Contractual indexation, which covers about 20% of our business, lags the cost impact by six to twelve months. The significant cost inflation we experienced in energy, and to some extent labour, in 2021 negatively impacted Q4 profitability. This negative impact will continue into early 2022 until the surcharges, price increases and contractual indexation catch up.

Bodycote generally achieves higher furnace fill rates than in-house facilities in manufacturing companies and is more energy efficient as a result. Energy used in the processes is largely independent of fill rates. As a result, in the mid to long term, higher energy costs actually increase Bodycote's competitive advantage, motivating more companies to outsource to us. This is amplified by the growing demand for companies to reduce their carbon footprint.

Ukraine invasion

Bodycote has no direct exposure to Russia, Belarus or Ukraine. Furthermore, we have no facilities, customers or suppliers in any of these territories, nor any raw materials or energy supply contracts from them. At this stage, it is too early to predict the broader potential impacts on the Group but we continue to monitor the situation closely and will take any necessary actions warranted by unfolding events.

Strategic progress and sustainability

Bodycote's strategy is based on:

1. Ensuring the safety of our employees and reducing our direct environmental impact, specifically on climate change.
2. Improving the overall quality of the business and focusing investment to drive long-term profitable growth.
3. Growing our Classical Heat Treatment business focused on electric vehicles and narrow-body aerospace platforms.
4. Growing our Emerging Markets' business.
5. Growing our Specialist Technologies' business.
6. Targeted acquisitions that support these growth areas.

The 2021 results highlight the continued progress we are making with our strategic focus areas. During the year, we opened three new facilities including one in our Emerging Markets, all of which contained Specialist Technologies. One of our HIP facilities in North America has undergone a major expansion and a new HIP facility is nearing completion. In December, we completed the acquisition of a small HIP operation in Western Europe.

I am pleased to report that we have continued to make progress on our sustainability strategy. Managing energy and reducing our impact on climate change has long been part of our corporate culture. We have committed to the Science Based Targets initiative (SBTi). The external focus on carbon emissions and climate change has increased significantly in recent years and most companies have correspondingly increased the attention they are paying to this important issue. It may not be immediately obvious, but Bodycote is part of the solution. Thermal processing, including heat treatment enables products to be lighter, more efficient, and longer lasting. Our inherently higher utilisation and energy efficiency than manufacturers' in-house heat treatment facilities, helps drive them to outsource to Bodycote, in turn lowering the overall carbon footprint. Moreover, our Specialist Technologies are inherently lower emissions technologies. Therefore, encouraging accelerated conversion to these technologies also plays a role in reducing overall emissions. This increased attention and

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