• Revenue: GBP399 million in the first half, up 1.5% organically pre surcharges.

• Operating Profit: Organic headline operating profit up 7% to GBP66.8 million.

• Operating Margin: Improved by 170 basis points to 16.7%.

• Earnings Per Share (EPS): Headline EPS up 5% to 25p.

• Interim Dividend: Raised by 3% to 6.9p.

• Operating Cash Flow: Broadly stable at GBP49.2 million.

• Free Cash Flow: Lower due to higher cash tax payments.

• Aerospace and Defense Revenue: Up 15% organically, accounting for almost 30% of revenues.

• Automotive Revenue: Fell by 1% organically, excluding surcharges.

• General Industrial Revenue: Down 4% excluding surcharges.

• Specialist Technologies Revenue: Organic revenues up 8%.

• Net Debt: GBP68 million, 0.7 times net debt to EBITDA.

• Capital Expenditure: GBP35 million in the first half, flat versus the first half of 2023.

• Share Buyback: GBP25.8 million deployed in the first half.

• Warning! GuruFocus has detected 4 Warning Signs with BYPLF.

Release Date: July 30, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Bodycote PLC (BYPLF) delivered a strong performance in the first half, with headline operating margins increasing by 170 basis points to 16.7%.

• The Aerospace and Defense division saw a 15% organic revenue increase, now accounting for almost 30% of total revenues.

• Specialist technologies continue to show strong growth, with organic revenues up 8%, outperforming the Classical Heat Treatment business.

• The company has successfully renegotiated contracts with key customers, particularly in North America, leading to improved margins.

• Bodycote PLC (BYPLF) has reduced its carbon emissions by 7.5% in the first half, enhancing its sustainability credentials and offering a compelling carbon reduction story to customers.

Negative Points

• The Automotive and Industrial markets have been challenging, with automotive revenues falling by 1% organically.

• General Industrial revenues decreased by 4% excluding surcharges, with particular weakness in Europe.

• The company faced a GBP28.3 million non-cash write-off related to the SAP ERP solution rollout, impacting financials.

• Free cash flow decreased by GBP17 million due to higher cash tax payments, affecting overall cash flow performance.

• Currency headwinds negatively impacted revenue by over GBP12 million, reflecting the strengthening of sterling against the dollar and euro.

Q & A Highlights

Q: Can you elaborate on the timeline and strategy for addressing underperforming sites within your footprint? A: Jim Fairbairn, CEO: It's too early to provide concrete plans, but work is underway. This is more about fine-tuning rather than major surgery, affecting a small proportion of our sites. The plan will likely take 12 to 24 months to execute, focusing on consolidation and repurposing assets rather than just closures.

Q: How long can you maintain flat headcount in the ADE division given its growth prospects? A: Benjamin Fidler, CFO: We can maintain flat headcount as long as necessary, controlling it tightly. We are mindful of supply chain challenges and have not over-hired. We expect to add more heads over the next two to three years as growth continues in aerospace and defense.

Q: Are there more opportunities for renegotiating long-term contracts, similar to the recent one in Surface Tech? A: Benjamin Fidler, CFO: Most of our business is not on long-term contracts, but we typically increase pricing annually. The recent renegotiation was significant due to its size and the strength of our customer relationship. We have done similar renegotiations with other customers where necessary.

Q: Can you provide an update on the EV contracts and their current status? A: Benjamin Fidler, CFO: We secured several EV and hybrid contracts last year, which are ramping up. The ramp-up process can take 12 to 24 months, and while the pace is slower than initially expected, these contracts are growing. We are also seeing growth in China with new positions in powertrain agnostic parts.

Q: What has surprised you positively and negatively since joining Bodycote? A: Jim Fairbairn, CEO: Positively, the quality and passion of our engineering and process know-how have surpassed my expectations. Negatively, I was surprised by the variability in operational performance across sites, which presents an opportunity for improvement.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.