"We achieved double-digit growth in Specialist Technologies' revenues, an excellent performance in our Emerging Markets and robust growth in civil aviation revenues. Our performance is testament to the Group's resilient operating model, with our focus on cashflow generation, operational efficiency and improving returns."

S.C. Harris
Group Chief Executive


Bodycote reported revenue growth of 5.6% to £728.6m (2017: £690.2m). Constant currency revenues grew 6.7%. Headline operating profit increased 12% to £138.3m (£123.9m) and return on sales further improved to 19.0% (2017: 18.0%). Statutory operating profit also increased 12% to £134.1m.

The following reflects constant currency growth rates unless stated otherwise.

Our Specialist Technologies delivered double digit growth of 12%, reflecting continued adoption of these technologies supported by ongoing investment in new capacity and capability. We achieved strong growth of 21% in our rapid growth Emerging Markets. This was helped by solid contributions from recent greenfield start ups, in particular in Mexico and China. We continued to invest in the structural growth opportunity represented by the civil aviation market where our revenues grew 8%.

Our return on sales continues to expand, reflecting our multiyear programme of pricing and efficiency improvements in the AGI Classical Heat Treatment business aimed at improving the quality of this business to a similar level to the ADE business. The movement in revenue mix in favour of our higher margin Specialist Technologies also added to the improvement in return on sales and is part of our long term goal of improving Group margins to world class levels.

The cash generative nature of Bodycote's business was underlined by the 93% headline operating cash conversion, and ROCE further improved to 20.5% from 19.3% in 2017. We delivered £97m of free cash after investing £44m in capacity and capability expansion, which will enable us to continue our earnings growth in future years.

Our Technologies

The Classical Heat Treatment (CHT) business contributed 76% of total Group revenues, with growth of 5%, reflecting growth across all our key market sectors.

We achieved 12% growth across our Specialist Technologies, which constitute 24% of the Group's revenues. Low Pressure Carburising (LPC) and Corr-i-Dur® (CiD®) both grew revenues over 20% and HIP Product Fabrication (HIP PF), grew over 30%. This reflects increased adoption of these differentiated technologies and is supported by investment in additional capacity across our network.

Emerging Markets

A key pillar of our strategy is targeted investments in rapidly growing Emerging Markets. Our revenues in these markets grew 21%. This growth was underpinned by buoyant performances in Mexico, as automotive exports to the USA increased, and from China where we are achieving increased penetration of the automotive market. Emerging Markets now represent 9% of Group revenues, up from 7% in 2016 (and up from 2% in 2009). Continued investment in these markets should sustain good growth into the future.

Market Sectors

Civil aviation revenues grew 8% in the year, with 12% growth in the second half as industry supply chain problems eased. The UK operations performed strongly again, supported by additional capacity in the final quarter of the year with our new aerospace facility in Rotherham (UK) coming on line. North American revenues also continued to build as production of LEAP engines ramped up and the supply chain bottle necks for titanium castings have started to ease.

General industrial markets represent 38% of Group revenues, serving a very broad range of industrial sectors. Revenues grew 6% in the year, representing further solid growth across our key geographies.

Revenues from the energy sector grew 13% in the year, notwithstanding the well publicised substantial fall in revenues from the large-frame industrial gas turbines' (IGT) original equipment manufacturers. Growth came predominantly from buoyant oil & gas revenues, much of it driven by demand in the Permian basin, although there was some evidence of customers de-stocking towards the end of the year. In the latter part of the year, revenues benefited from shipments on HIP PF subsea contracts that had been won earlier in the year. The order book in subsea work continues to grow at an increasing rate.

The automotive business grew 7%. This was another strong performance against the backdrop of flat markets in both Western Europe and North America, reflecting the excellent growth of Specialist Technologies in the sector.

Investment in growth

During the year, we invested £44m (more than 50% of overall gross capex) across our entire business to support future growth, adding new capacity into existing facilities, as well as developing new facilities. It takes some time to build a new facility and subsequently typically takes a further three to five years for revenues to fully mature. Since the beginning of 2016, we have opened nine new facilities, focused on market sectors with long term structural growth, expanded our footprint in rapid growth Emerging Markets, and grown our Specialist Technologies' businesses. These facilities, which are strongly underpinned by contracts from anchor customers, are contributing meaningfully to the Group's revenue growth as they ramp up.

We acquired a Classical Heat Treatment facility in the United States of America towards the end of the year, which will fit well with our existing business in the South East, enhancing growth and operating efficiency.

We also have an exciting pipeline of new investments, including new facilities being built in Illinois and New York (USA), in Italy and new facilities in the Emerging Markets of Hungary and Czech Republic. Furthermore, we are adding additional HIP capacity into the USA and European markets to meet civil aviation demand.

Profit and Earnings

As expected, we experienced higher input cost inflation in a number of our markets, with pressure coming from tighter labour markets, and cost increases in utilities and industrial gases that we use in our processes. We continue to proactively manage this to ensure that the value of our price increases at least offsets the cost increases incurred.

The Group's profit improvement, coupled with a headline tax rate of 21.7% (2017: 22.9%), increased basic headline earnings per share to 55.9p (2017: 49.2p). Basic earnings per share increased to 54.2p (2017: 51.0p).

Strategic Progress

The Group's strategy encompasses the drive for operational efficiency and delivering strong return on sales and good return on capital employed. The Group is committed to invest to support profitable growth. The priorities for growth are capacity and capability enhancement in Specialist Technologies, expansion of the Group's footprint in rapid growth Emerging Markets and investment in markets with long term structural growth such as civil aviation and growth through targeted acquisitions. The Group has a minimum 20% hurdle rate return when appraising investments.

During 2018, we made continued progress against our strategy, delivering both higher return on sales of 19.0% (2018: 18.0%) and an increase in ROCE to 20.5% (2018: 19.3%).

Civil aviation revenue grew 8%, Emerging Markets revenues grew 21%, and Specialist Technologies grew 12%, which all reflect the success of the investment focus of the Group in these businesses over a number of years.

We continue to look at acquisition and investment opportunities. These are traditionally bolt-on facilities that can provide us with infills to our existing network. Where the opportunities to buy such facilities with good prospects do not exist we will build new facilities. Newly constructed facilities have a ramp up period, but have the advantage of being designed exactly in line with the Group's technology and operational efficiency focus. Since 2014, we have invested over £210m in both acquisitions and investment for growth in new and existing facilities. The growth noted above in civil aviation revenues, Emerging Markets revenues and Specialist Technologies revenues, have all been boosted by these investments. In many cases, the revenues from these past investments are still ramping up and so will contribute to growth in revenue and profit in the coming years.

Organisation and people

Bodycote is a service business and our first-class service is delivered by committed individuals, who understand their customers' needs and meet their demanding and changing requirements on a continual basis. Our people are the cornerstone of the business and it is through their endeavours, day in and day out, that we create value and deliver our objectives. Developing our employees to ensure that our talented workforce remains one of our competitive advantages is a priority for the Group.

Summary and Outlook

2018 has once again demonstrated the strength of Bodycote's strategy and business. We achieved double-digit growth in Specialist Technologies revenues, an excellent performance in our Emerging Markets and robust growth in civil aviation revenues.

Combined with pricing discipline in the face of significant cost pressures, the Group was able to improve return on sales. Together with the revenue growth this delivered a healthy increase in headline earnings per share. Our performance is testament to the Group's resilient operating model, with our focus on cashflow generation, operational efficiency and improving returns.

While we are conscious of the global macro-economic backdrop, we have entered 2019 well positioned and at this early point in the year, our expectations for 2019 remain unchanged.

S.C. Harris
Group Chief Executive
8 March 2019