Chairmans Executives Review
"The Group delivered another good performance in 2014. Revenue, at constant exchange rates, was ahead 4% and we achieved further improvement in margin and return on capital employed, in addition to strong cash generation."

S.C. HarrisGroup Chief Executive


I am pleased to be able to report on another successful financial year for Bodycote. The Group delivered 4.0% revenue growth at constant exchange rates, although after taking account of the foreign exchange impact revenue declined 1.7%. This performance was particularly encouraging given the lacklustre macro-economic background. Bodycote outperformed the market in many of its sectors and increased its market share in the year.

Group headline margins were expanded by 90 basis points to 18.2% driven by mix improvements across the business and increases in operating efficiency, particularly in Europe. Headline margins in Aerospace, Defence & Energy (ADE) were flat at 26.8% (2013: 27.0%) in keeping with the Group's strategy of preferentially pursuing growth in this part of the business but without targeting further increases in margin. Meanwhile, Automotive & General Industrial (AGI) headline margins increased by 90 basis points to 15.6%. Much of this increase was generated in Western Europe, which has been an area of focus and increased management attention. Progress has been good but there is still work left to do to achieve the full potential of this part of the Group's activities.

Group headline operating profit increased by 3.4% to £111.1m (2013: £107.4m) despite the decline in reported revenues. At constant exchange rates, growth was 9.2%. Headline earnings per share grew by 6.3% to 43.8p, helped by a one-off reduction in taxes.

Net capital expenditure of £53.8m (2013: £57.3m) was 1.0 times depreciation (2013: 1.0 times), although gross capital expenditure before the benefit of asset sales was 1.1 times depreciation (2013: 1.0 times). Return on capital employed is now 20.7% (2013: 19.9%). Headline operating cash flow was £100.0m (2013: £108.9m) corresponding to a 90.0% cash conversion rate (2013: 101.4%). The company finished the year with a £35.7m net cash position (2013: £15.0m).

Bodycote's strong cash flow generation is a feature of its business model and remains a high priority. This ability to consistently generate high levels of cash has been repeatedly demonstrated over the past several years. While the Group's top priorities for the use of this cash are funding organic growth and enhancing the core dividend, the Group is continually on the lookout for value enhancing acquisitions to boost growth and increase shareholder value. If no such acquisitions are imminent and available funds exceed the immediate needs of the business, then it is our intention to make supplemental distributions to shareholders, as the Board is recommending once again this year. Free cash generation was £75.1m and has comfortably exceeded £70.0m in each of the last three years.

Strategic progress

The strategy of preferential investment and expansion in our Specialist Technologies that has been pursued since 2009 has again made a meaningful impact on Group financial performance. In 2014 these technologies contributed some 24% to Group revenue, which was up from 14% in 2007. The six Specialist Technologies are HIP Product Fabrication (HIP PF), Specialty Stainless Steel Processes (S3P), HIP Services, Surface Technology, Low Pressure Carburising and Corr-I-Dur®. In 2014 they had a combined operating margin of over 30% (stated before central costs) and in total contributed 38% of Group headline operating profit. Depending on the technology, Bodycote occupies either a unique or a very strong position in the market. Our success with these technologies will, sooner or later, attract greater competition but notwithstanding this, the market size, future growth potential and ability to generate superior margins from these processes are all very significant. Year-on-year growth in this area of the business was 17%, at constant exchange rates.

Our strategy of expanding in the rapid growth countries saw new plants announced in Turkey, Poland, China and Mexico. However, the total number of facilities in the Group fell to 188 as several uneconomic, commodity oriented sites were closed in Europe. Usable equipment was or will be transferred to other sites in the Group, but the exit from commodity work offset the growth achieved elsewhere in the classical heat treatment side of the business and overall the increase was constrained to 1% at constant exchange rates as a result.

The results of the ongoing pursuit of operational excellence continue to be rewarding. One of the methods used to enhance margins and improve pricing and mix is the Bodycote Margin Model. This is a tool that has been developed by the Group over the last five years and the rate of adoption of the methodology is increasing, now with particular success in Germany and the Netherlands. This approach and other practices such as lean manufacturing are helping to drive the performance improvement of the Classical Heat Treatment business.

Summary and outlook

The Group delivered another good performance in 2014. Revenue, at constant exchange rates, was ahead 4% and we achieved further improvement in margin and return on capital employed, in addition to strong cash generation.

As we begin 2015 a number of macro-economic uncertainties persist. Nevertheless, at this early stage in the year, the Board believes that the strength of the Group's Specialist Technologies and management's continued focus on business improvement, particularly in the Classical Heat Treatment business, should enable further progress in 2015.

S.C. HarrisGroup Chief Executive
26 February 2015