"2017 has once again demonstrated the quality of Bodycote's business. The Group's revenue growth, combined with continued discipline on costs, helped lift headline operating profit by 24%. Return on sales increased to 18.0% from 16.6%."

S. C. Harris
Group Chief Executive

S. C. Harris


Bodycote reported revenue growth of 14.9% to £690.2m (2016: £600.6m), with revenue benefiting from foreign exchange translation gain. At constant currency, revenues grew 9.6%, including a contribution of 2.9% from acquisitions completed in 2016.

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

General industrial markets returned to growth after a multi-year negative trend. Moreover, this growth was broad-based, with improvements in general industrial demand occurring in all of our served geographies. Group revenues generated from the general industrial sectors, which represent some 39% of our business, grew 10%, which was well above the growth in background demand. Of this growth, 4 percentage points came from acquisitions made in 2016. The remainder of the Group's outperformance in general industrial versus the market came from the increased penetration of Specialist Technologies (which grew 14% in this sector), as well as an element of some customer restocking.

The decision we took to preserve the capacity at our Texas/Oklahoma facilities is being well rewarded, as we have also seen a reversal of the sharp declines that we had experienced in onshore oil & gas demand. Growth in onshore oil & gas saw a strong sequential increase in 2017, driven predominantly by demand from unconventional drilling activity in the Permian Basin. In the rest of the energy sector, subsea revenues continued to decline and large-frame industrial gas turbines (IGT) are also in retreat following cutbacks at the original equipment manufacturers (OEMs). It is worth noting, however, that requests for quotation in the subsea sector have picked up considerably. In total, revenues from the energy sector increased by 4%.

Civil aviation grew 6% with our UK operations continuing to add significant business. This increase will require new facilities to be built in 2018 in the UK in order to service forecast demand. North America also started to contribute to the growth in a more meaningful way as the build rate of LEAP engines continues to grow. Bodycote has a much stronger position on the LEAP series than it did on the previous CFM56, which is a testament to the success of the focused sales and investment programme that has been undertaken over the last decade.

The automotive business saw growth of 14% with the majority of this increase coming from the car and light truck sector. This compares to background demand growth in Europe of low single digits and a slight decline in the USA. Our strong performance benefited from the contribution from the acquisitions made in 2016, together with the investments we have made in Emerging Markets and Specialist Technologies.

In our Specialist Technologies, we achieved double-digit revenue growth across our Specialty Stainless Steel Processes (S3P), low pressure carburising (LPC) and Corr-I-Dur® (CiD) technologies. However, several factors dragged on overall sales growth during the year. The HIP Product Fabrication (HIP PF) and Surface Technology businesses are focused largely on oil & gas outside of the USA, with particular emphasis on subsea and these revenues continued to decline. In addition the weakness in IGT volumes resulted in a slowdown in the HIP Services business towards the end of the year. Also impacting our HIP Services business was an unplanned outage during the second half (which was fully resolved by year end). Forecast growth in all the Specialist Technologies looks strong.

The five sites we acquired in 2016 are performing well. They are all Classical Heat Treatment sites within the AGI division and contributed £23.0m of revenue in 2017, with return on sales in line with the Group. It is also worth highlighting that revenues at these facilities have accelerated since coming into the Group as a result of the benefits derived from being part of the Group's network of facilities.

With careful cost discipline in the face of growing revenues, the Group's headline operating profit grew 24% to £123.9m (26% growth in statutory operating profit to £119.4m) and the return on sales improved to 18.0% (2016: 16.6%). Once again, we increased our prices ahead of cost inflation. This is an area of heightened focus for the Group especially as we are entering a period of higher input cost inflation in some markets. It is worth noting, however, that Bodycote typically performs well in higher inflationary environments.

The Group's strong profit improvement, coupled with a headline tax rate of 22.9% (2016: 27.5%), increased basic headline earnings per share to 49.2p (2016: 37.0p). Basic earnings per share increased to 51.0p from 35.2p.

The return on capital employed rose in the current year to 19.3% from 17.1% in 2016.

Free cash flow increased to £83.0m (2016: £60.5m) as a result of our improved profitability and in spite of increased capital expenditure to support the future growth of the business. Headline operating cash conversion was, once again, above 90%, yielding a net cash position at the end of the year of £39.6m (2016: £1.1m).

Strategic progress

The Group's strategy encompasses the drive for operational efficiency and improvement in return on sales; growth in markets with higher long term structural growth; the expansion of the Group's footprint in rapid growth markets; the focus on revenue growth in Specialist Technologies; and growth through targeted acquisitions, where these are more attractive than investing in new facilities. The Group has a minimum 20% hurdle rate return when looking at investments.

During 2017 we made further progress against our strategy, delivering higher Group return on sales of 18.0%. We believe there is still the opportunity to further improve from both management led initiatives, particularly in our AGI division, and growth in our higher return Specialist Technologies.

In 2017 we continued to invest in areas with superior growth potential, with a deliberate bias towards investments in rapid-growth markets, Specialist Technologies, and long-cycle programmes, particularly in civil aviation: Emerging Markets revenues increased 26% to £54.1m, representing 8% of Group turnover, with growth in Mexico and China both above 40%. We will continue to invest to support the future of our business in these rapid growth markets. During the year, we commissioned several new LPC and S3P lines. In HIP Services we acquired the HIP assets from Doncasters Group Limited's UK business and a new mega-HIP was ordered for Europe which will come online in 2018. Further new facilities are expected to be commissioned in 2018 for both Specialist Technologies and Classical Heat Treatment in our focus geographies and markets. The additional capacity that will come on stream in 2018 will add to our ability to deliver strong growth and superior return on sales over the coming years.

We also continue to look at acquisition and investment opportunities that will grow our business. These are traditionally small bolt-on facilities that can provide us with infills to our existing network. Where opportunities to buy such facilities do not exist, we will build new facilities; these obviously 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 £164m in both acquisitions and investment for growth in new and existing facilities, with revenues from the latter still ramping up as these plants typically take 3–5 years to reach full production.

Organisation and people

Bodycote is a service business, and first-class service is delivered by passionate and professional people, who understand their customers' needs and meet their demanding requirements time and time again. We will continue to invest in training and developing our employees to ensure that our talented workforce remains one of our competitive advantages.

Summary and outlook

2017 has once again demonstrated the quality of Bodycote's business. Strong growth was achieved through contributions from contract wins on automotive and aerospace programmes, excellent growth in Emerging Markets (where our investments are yielding good returns), and broad-based growth across the general industrial sectors, an element of which was due to some customer restocking.

The Group's revenue growth, combined with continued discipline on costs, helped lift headline operating profit by 24%. Return on sales increased to 18.0% from 16.6%.

To ensure that the business continues to deliver good results, we will continue to focus on efficiency, maintaining price discipline in light of increasing inflation across many economies, and the execution of our successful strategy.

Our business, by its nature, has limited forward visibility, but we have entered the year with good momentum. Accordingly, and in spite of the foreign exchange headwind at current exchange rates, 2018 has started in line with our expectations.

S.C. Harris
Group Chief Executive
6 March 2018