Bodycote Plc · LSE:BOY
Bodycote — Investor Day (2011)
84 slides from Bodycote's investor day presentation, 2011
Slide 1: Growth & Resilience - introduction
Growth & Resilience - introduction Stephen Harris, CEO
Slide 2: Today's agenda
Today’s agenda... 1) Introductory presentation Stephen Harris 2) Insight into growth opportunities Divisional Management 3) Modeling growth – and a possible downturn David Landless 4) Summary Stephen Harris 2 Growth & Resilience - introduction
Slide 3: Bodycote processes
Bodycote processes THERMAL PROCESSING Heat treatment Hot Isostatic Pressing (HIP) Surface Technology Highly precise improvement of properties in The ultimate strengthening Temperature and metal components process wear protection GLOBAL LEADERSHIP 3 Growth & Resilience - introduction
Slide 4: Independent thermal processors
Independent thermal processors Overall market estimated at £20bn* c20% outsourced to independents Bodycote the only global player Handful of regional players Mostly localised groups or single Long tail of local suppliers site operations * Management estimate Bodycote 3x bigger than next la
Slide 5: What is heat treatment?
What is heat treatment? Improves Changes crystal properties, e.g.: Precise structure temperature Strength Creates cycling in Hardness ‘diffusion’ layer controlled Wear resistance atmosphere Changes internal stresses Corrosion Temp Centigrade resistance Different cycles and gases produce different ch
Slide 6: What is HIP?
What is HIP? Hot: up to 2,000°C Isostatic: omnidirectional inert gas pressure Pressure: up to 45,000 psi Before HIP Eliminates porosity in castings or sintered components Improves density Improves material properties, e.g. strength After HIP 6 Growth & Resilience - introduction
Slide 7: What is surface technology?
What is surface technology? A group of processes used to apply a ceramic or cermet coating to metals Includes plasma spray, HVOF and thermo-chemically formed ceramics Finely divided metallic or non-metallic materials, usually in powder form, are deposited onto the surface of components in a se
Slide 8: The value proposition
The value proposition Heat treatment Bodycote An essential enabler Scale benefits: of modern technology - 170 plants - 1,920 process lines Optimises strength where it’s needed Multiple processes and multiple plants Process control – total predictability are major advantage to customers Missi
Slide 9: Where is Bodycote?
Where is Bodycote? Western Europe North America Emerging Markets 170 plants · 27 countries · 1,920 process lines · 5,500 employees 9 Growth & Resilience - introduction
Slide 10: Spread of activities 2011 H1 sales
Spread of activities 2011 H1 sales Markets Energy 12% General Aerospace Industrial 20% 42% Automotive 26% Geography 10 Growth & Resilience - introduction
Slide 11: Performance history
Performance history excludes Testing, at 2011 exchange rates 30% Margin % 700 Sales £m £619m 600 25% 500 20% 400 15% 12.9% 300 10% 200 100 5% 0 0% 00 01 02 03 04 05 06 07 08 09 00 01 02 03 04 05 06 07 08 09 Prior to 2008 BUT Network expansion Capital utilisation weak Growth via acquisitions &
Slide 12: The new Bodycote
The new Bodycote Sales* (£'m) Margin* (%) 700 30% H1 H2 600 25% H2 500 H1 20% 400 15% 300 200 10% 100 5% 0 0% 08 09 10 11 -5% 08 09 10 11 2009 – a new beginning New focus Major restructuring Business ‘quality’ Better margins Withdrawal from low profit, low potential plants Capital efficien
Slide 13: Our strategy
Our strategy Maximise return on existing assets Enhance business processes Divisional market focus Migrate with our customers to emerging markets Longer term growth from targeting proprietary technologies 13 2009 Preliminary Results
Slide 14: Investing in five drivers for growth
Investing in five drivers for growth Aero & Energy Secular Growth Emerging Markets Technology Change HIP Product Fabrication S3P 14 Growth & Resilience - introduction
Slide 15: Aerospace & Energy – Secular Growth Markets
Aerospace & Energy – Secular Growth Markets
Slide 16: Aerospace & Energy
Aerospace & Energy Market characteristics: Advanced requirements Low volumes Complex supply chains Late cycle Bodycote characteristics: Specialist state-of-the-art plants Nadcap quality accreditations Global 16 Aerospace & Energy - Secular Growth Markets
Slide 17: Bodycote's processes
Bodycote’s processes Aero and gas turbine components must operate in high temperatures. Heat treatment, HIP and surface coatings are essential. Cast blades are Honeycomb Precipitation Thermal spray “HIPed” to is vacuum hardened to coating to increase their brazed onto increase improve creep & fatigu
Slide 18: Global market position
Global market position Aerospace, defence and energy ADE Plants proportions Heat treatment c60% 37 ADE specialist Hot Isostatic Pressing (HIP) c30% 10 specialist Surface technology c10% 5 specialist Leading global player - HT and HIP 18 Aerospace & Energy - Secular Growth Markets
Slide 19: Aerospace
Aerospace Boeing/Airbus deliveries & guidance* Passenger RPKs * 2015 is a management estimate CAGR GDP +4% Boeing/Airbus backlog >6000 737 monthly build increasing from 31 to 42 787 launch backlog >800 A320 monthly build increasing from 36 to 44 High visibility of long-term growth 19 Aerospa
Slide 20: Power generation
Power generation *Source: MB Strategy/ Energy Information Administration New capacity forecast to more than double from current low GE and Siemens comprise c60% of annual new capacity Shift to higher efficiency designs - GE 7H, 9H, LMS100 Growth ahead driven by forthcoming energy capacity shor
Slide 21: Oil & Gas
Oil & Gas *Source: MB Strategy / Baker Hughes Rig count forecast to grow 20% over next 3 years Non-US rig contribution growing from 40% to 50% US fracking/directional drilling driving advanced treatments Energy requirements drive exploration boom 21 Aerospace & Energy - Secular Growth Markets
Slide 22: Bodycote leads the market
Bodycote leads the market Broad spectrum of capabilities Expansive accreditations & approvals list Surface coatings Nadcap (key aerospace approval) Hot isostatic pressing Norsok (key oil & gas approval) Metal joining AMS (Aerospace Material Specification) Full heat treatment portfolio
Slide 23: In summary – secular growth
In summary – secular growth Boeing/Airbus deliveries & guidance* * 2015 is a management estimate *Source: MB Strategy/ Energy Information Administration *Source: MB Strategy / Baker Hughes Aerospace & energy set for good growth, even if economy is turbulent Bodycote has strong leadership positio
Slide 24: Emerging Markets
Bodycote Emerging Markets Bodycote a)
Slide 25: Emerging markets – where we are
Emerging markets – where we are Largest Eastern Europe Brazil Fastest Growing China Mexico Turkey Strategic Outposts 2011 H1 Proportions India Singapore Emerging markets – today 10% of Group sales 28 plants in 11 countries 25 Emerging Markets
Slide 26: Emerging markets competitive advantage
Emerging markets Competitive advantage Partnership with established Western customers Global knowledge of customers and products Proven technology transfer capabilities Market leadership – here for the long haul Bodycote management system Comprehensive quality accreditations Long-term
Slide 27: Bodycote positioning
Bodycote positioning Partnering with global tier-1 and tier-2 component manufacturers requiring western-quality metal processing 27 Emerging Markets
Slide 28: Emerging market expansion strategy
Emerging market expansion strategy Preferred to: Build plant clusters – hub and spoke model Lone greenfield: Establish linked plants in same region Many challenges Build on success Several years of losses Immediate growth Rapid break-even Acquire – and reshape: Much quicker Costly/ri
Slide 29: Hub & Spoke development cycle
Hub & Spoke development cycle a) Begin working with 2-4 new customers b) Develop and prove prototype capability c) Run initial production in hub d) Build new satellite plant e) Move customers from hub to satellite f) Replace customers in hub and repeat g) Add other customers local to satellites Indi
Slide 30: Developing our established territories
Developing our established territories profitable and growing Well established Growing and good profits Restructuring complete Work in progress • China • India • Brazil • Czech • Singapore • Hungary • Add high-value • Poland • Add high-value sales • Romania sales & incremental • Turkey capacity • De
Slide 31: In summary... Stronger growth ahead
In summary... Today: 29 plants 10 countries Encouraging profits Good growth Next: Build out plant clusters Focus on China Stronger growth ahead 31 Emerging Markets
Slide 32: Changing Technology
Bodycote Changing Technology
Slide 33: Technology change
Technology change Customer technical needs Examples of new are changing Bodycote technology to meet customers’ changing Environmental legislation technical needs forcing change 2 new processes explained 33 Changing Technology
Slide 34: European directives restrict use of Chrome VI
European directives restrict use of Chrome VI Hexavalent chrome – Chrome VI – is a known toxin EC directives protect drinking water from Chrome VI pollution by waste recovery requirements Redesign of machinery and cars eliminates passivated zinc and electroplated chrome Favours nitrocarburisin
Slide 35: Corr-I-Dur®
Corr-I-Dur® Superior corrosion resistance Process unique to Bodycote Eliminates Chrome VI – corrosion protection benefits Automotive and machinery applications Hydraulic equipment pistons Brake piston 60hr salt spray test vs (280gm v prior 440gm chemical coatings 35 Changing Technology
Slide 36: Corr-I-Dur®
Corr-I-Dur® Complex, precise, high value process Multi-layer protection Adds nitrogen, then oxygen Cycle time: 12-20 hours 36 Changing Technology
Slide 37: Average CO2 emissions/car
Average CO2 emissions/car Grams/Km EU legislation: 130 gms by 2015 200 95 gms by 2020 150 Lower than Smart car (97 gms) 100 50 Easy wins: already happened 0 Next steps: more technology, lower weight 00 05 10 15 20 More technology: Lower weight: Energy recovery, More heat Smaller mechanical hyb
Slide 38: Classical carburising v new LPC technology
Classical carburising v new LPC technology Low Pressure Carburising – similar process, but under vacuum 38 Changing Technology
Slide 39: Low pressure carburising
Low pressure carburising Many advantages... ...for the environment Lower emissions ...for Bodycote Shorter cycle – more throughput Lower energy use ...for customers Improves fatigue behaviour and distortion Clean surfaces (even blind holes) No need for grinding Stronger lighter plants
Slide 40: In summary – technology change
In summary – technology change Customer needs impacted New Bodycote solutions – by legislation: examples: Elimination of Chrome VI Corr-I-Dur® Improved CO2 emission Low Pressure Carburising - more technology - stronger, smaller parts Growing heat treatment requirement Particularly for ne
Slide 41: HIP Product Fabrication
Bodycote HIP Product Fabrication
Slide 42: The opportunity
The opportunity Penetrating market for: – Low-volume large complex parts – With optimum mechanical strength The market is currently served by top-end forgings – we estimate the market size for stainless steel forgings at €1 billion. 42 HIP Product Fabrication
Slide 43: Product fabrication process
Product fabrication process Powdered alloy Design capsule Manufacture capsule Powder fill capsule HIP Heat treatment Inspection 43 HIP Product Fabrication Finished product End application
Slide 44: Hot Isostatic Pressing (HIP)
Hot Isostatic Pressing (HIP) Process What does the process do? Heats up to 2000°C Consolidates alloy powders to 100% Compresses up to 300 MPa solid metal Inert gas – Nitrogen or Argon Eliminates porosity in microstructure Processes for up to 30 hours of components Improves mechanical p
Slide 45: Market segments & applications
Market segments & applications Energy – Oil & Gas – Valve bodies, pump housings, swivels, tees, hubs, manifolds Machinery – Extrusion barrels Tooling – Bars (solid and hollow), rectangular blocks, billets Electronics – Sputtering targets for flat panel display, semiconductors Power generat
Slide 46: Advantage vs other fabrication methods
Advantage vs other fabrication methods Near-net shape HIP PM was used to manufacture superconducting dipole cryomagnet end covers for the world’s largest energy subatomic particle accelerator known as the Large Hadron Collider. CERN comparison of critical criteria for four fabrication techniques con
Slide 47: Barriers to entry
Barriers to entry Know-how: – Substantial know-how required – Both art and science – Our HIP knowledge established over decades – Includes design and modelling of complex shapes Investment: – HIPs are very expensive – a large HIP costs > £10m – Bodycote has 50 of varying sizes in multiple locati
Slide 48: Global leader
Bodycote HIP market position Global leader 50 55% HIP VESSELS global market share PLANTS (excluding captives) US & EUROPE 48 HIP Product Fabrication
Slide 49: Strong growth prospects
HIP Product Fabrication – the future... Strong growth prospects Bodycote is: Well ahead with missionary selling task Current growth: Establishing key customer partnerships Developing know-how for different applications > 50% p.a. Investing in resources and capacity 49 HIP Product Fabrication
Slide 50: S3P – Specialty Stainless Steel Processes
S3P – Specialty Stainless Steel Processes
Slide 51: Stainless steel
Stainless steel What is stainless steel? Steel alloy with minimum 12% chromium content Chromium oxide provides the corrosion resistance New York Times, 31 January 1915 51 S3P - Specialty Stainless Steel Processes
Slide 52: Corrosion
Corrosion Corrosion is costly Friction, wear and corrosion of steels, including consequential losses, is estimated to cost 5% of European GDP. 52 S3P - Specialty Stainless Steel Processes
Slide 53: Market analysis – stainless steel
Market analysis – stainless steel Stainless steel production worldwide: Stainless steel 31m tonnes (2010) S3P processed 6% CAGR over last 5 years We process a minute share of total stainless steel > Growth in 2011 H1 c.50% 53 S3P - Specialty Stainless Steel Processes
Slide 54: Characteristics of stainless steel
Characteristics of stainless steel Many excellent characteristics – particularly corrosion resistance But... disadvantages: – Low strength – Low surface hardness – Low wear resistance – High risk of adhesion S3P solution Overcomes disadvantages 54 S3P - Specialty Stainless Steel Processes
Slide 55: S3P offering
S3P offering Enhances... Wear resistance 3x and more Surface hardness 5x Avoidance of sticking Overcomes weaknesses of stainless steel better than alternatives Several can harden – only we can maintain corrosion resistance Unique, premium offering – for customers that need the best 55 S3
Slide 56: S3P offering – business concept
S3P offering – business concept S3P is a solution provider Premium priced technology Missionary selling approach Highly diversified markets - worldwide Unique, proprietary product Process has high price – but benefits justify cost 56 S3P - Specialty Stainless Steel Processes
Slide 57: S3P offering – locations
S3P offering – locations Germany France Netherlands USA Track record: > 5yr CAGR 17% despite economic crisis > strong margins 57 S3P - Specialty Stainless Steel Processes
Slide 58: Examples of S3P applications
Examples of S3P applications INDUSTRIAL FLUID & GAS HANDLING FOOD MANUFACTURING & PRODUCTION Key factors Key factors Large dimensions treatable No risk of delamination v coating Increased wear resistance No sticking of tight tolerance parts Maintain corrosion resistance Outperf
Slide 59: Examples of S3P applications
Examples of S3P applications AUTOMOTIVE MEDICAL DEVICES Key factors Key factors Highly resistant to surface wear Biocompatibility No post treatment machining required Maintains sharp edge during operation Withstands modern fuel concepts Non-magnetic behaviour is maintained
Slide 60: S3P actions
S3P actions 50% more capacity by end 2012 Increase penetration of existing markets Continue missionary selling Expand into emerging markets in due course 60 S3P - Specialty Stainless Steel Processes
Slide 61: S3P – Specialty Stainless Steel Processes
S3P – Specialty Stainless Steel Processes Opportunity for substantial growth Outstanding margins Niche process – wide market applications 61 S3P - Specialty Stainless Steel Processes
Slide 62: Growth & Resilience
Growth & Resilience Scoping the growth opportunities The possibility of a downturn Modelling some hypothetical scenarios David Landless, Group Finance Director
Slide 63: Median case growth scenarios – 5yr horizon
Median case growth scenarios – 5yr horizon Growth Elements GDP 1% + Share Inflation 2% of Growth Premia Gp. Sales + 30% Secular market growth 5% 15% Changing Technology 5% 10% Emerging markets 10% 5% 6% Proprietary technology 20% + Out-sourcing 1% Discount -2% = Bodycote growth 6% 63 Growth & Resili
Slide 64: 5 year revenue model
Median case revenue – reality not a single line 5 year revenue model 150 140 130 120 +3% +2% 110 0.0% 0.0% +1% 100 0.0% MEDIAN 0.0% 90 -1% 0.0% -2% 80 0.0% -3% Bodycote median case 6% 70 60 50 0 1 2 3 4 5 64 Growth & Resilience
Slide 65: Prospects
Prospects “Premium growth” of 5% to Secular Aero & 4 growth general market Energy growth initiatives Discounted to 3% Possibility of a “double dip” impacting the general market Next slides provide historical context to scale of possible downturn And show our increased resilience 65 Growth
Slide 66: The long view
The long view Year on year HT industry output change – at constant prices* *Source: US Federal Reserve – Heat Treatment & Coatings 2009 truly exceptional 26% decline Typical cycle: a decline of 5 -10% once in 10 years 25 year CAGR: 3% at constant prices 5% at actual prices History: - CAGR 5%,
Slide 67: US auto industry output – 25 years by quarter
US auto industry output – 25 years by quarter Source: Federal Reserve 2009 crisis unique - Auto production troughed at 40% of prior level - GM bankruptcy and crises at other US majors 67 Growth & Resilience
Slide 68: Boeing build units & PCC sales by quarter
Boeing build units & PCC sales by quarter Source: Boeing and Precision Castparts Boeing production halt impacted suppliers in following year +28% Boeing 2009 on 2008: PCC -20% Disruption to Boeing supply chain followed 2008 strike Supply chain also impacted by 787 development traumas (& A380) Suppli
Slide 69: Industrial production – incidence of downturns
Industrial production – incidence of downturns Source: US Federal Reserve data for industrial production - 25 year history Industrial production Bodycote Trend growth 2% We’ve evaluated a 10% deviation Deviations from trend growth: from trend 2009 crisis 13% Why 10%: 4 shortfalls of 2-6%
Slide 70: 5 year revenue model – 10% downturn
Hypothetical scenario - 10% downturn from trend 5 year revenue model 150 140 130 120 +3% +2% 110 0.0% 0.0% +1% 100 0.0% MEDIAN 0.0% 90 -1% 0.0% -2% 80 0.0% -3% Bodycote median case 6% 70 60 50 Economic downturn -10% 0 1 2 3 4 5 70 Growth & Resilience
Slide 71: Drop-thru from top-line to bottom-line
Drop-thru from top-line to bottom-line Bodycote has substantial infrastructure £m Cost analysis at H1 2011 and fixed costs – and modest direct costs 300 Var. High drop through: - benefits incremental sales 150 Semi - hurts “decremental” sales fixed Fixed - 08 H1 09 H1 10 H1 11 H1 Bodycote business m
Slide 72: Profit effect of sales drop
Profit effect of sales drop Aero & Energy Auto & General US/UK bias Industrial Europe US & ROW Effect on profit of sales drop of 100: After 1 week 90 90 90 After 3 months 60 70 60 After 9 months 50 45 40 Impact of sales drop in AGI less than impact of same drop in ADE Takes longer to achieve cos
Slide 73: Cost profile in different scenarios
Cost profile in different scenarios Normal steady Hypothetical growth sudden downturn Margin Cost gearing beneficial in Margin growth scenario Variable Variable If sudden downturn occurs semi-variable cost re-alignment Semi- Re-aligned takes several months variable over several months Ability
Slide 74: Hypothetical Scenario: 10% downturn
Hypothetical Scenario: 10% downturn 150 25% Revenue Margin 140 Base = 100 130 20% 0.8% 120 1.5% +3% 1.2% +2% 110 15% Bodycote growth 1.0% +1% 100 0.2% offset by downturn 4.7% MEDIAN -1% 90 10% -2% 80 -3% 70 5% Bodycote growth 6% 60 50 0% Economic downturn -10% 0 1 2 3 4 5 0 1 2 3 4 5 More resilien
Slide 75: Cashflow resilience – EBITDA utilisation
Cashflow resilience – EBITDA utilisation 30 Cashflow Cashflow Scenarios Scenarios Status quo: 25 % to Sales % to Sales Net cash generation 8% to 20 Net cash gen sales Dividend 15 Tax Growth scenarios: 10 WC & Legacy Capex 1.2x to 1.5x depn. Growth capex Base capex Significant net cash 5 genera
Slide 76: Scenario: Median case 6% 5yr CAGR
Scenario: Median case 6% 5yr CAGR 150 25% Revenue Margin 140 Base = 100 130 20% 0.8% 120 1.5% +3% 1.2% +2% 110 15% 1.0% +1% 100 0.2% MEDIAN 4.7% -1% 90 10% -2% 80 -3% 70 5% Bodycote median case 6% 60 50 0% 0 1 2 3 4 5 0 1 2 3 4 5 76 Growth & Resilience
Slide 77: Recap
Recap “Premium growth” of 5% Secular Aero to general Return to 4 growth & Energy market high teen initiatives growth margins Discounted to 3% Cash generation transformed – now minimal borrowings 77 Growth & Resilience
Slide 78: Growth & Resilience – a recap
Growth & Resilience – a recap Stephen Harris, CEO
Slide 79: Bodycote has changed
Bodycote has changed Rear view mirror – prior to 2009: Now: Network expansion Withdrawn from low margin business Substantial Focus on business quality investment Bench strength enhanced BUT... Margins starting to climb above the Cash generation 10 year plateau weak Cash flow transfor
Slide 80: Much more resilient than 2008/09
Much more resilient than 2008/09 Then Now Growth mix Problem sites Varied growth engines Boeing distortions Secular Aero/Energy US auto industry near growth death experience Margins 13% falling to 2% Low double digits to high teens Fixed costs Legacy overhang Much lower Cash flow
Slide 81: Above market growth aspirations
Above market growth aspirations Growth Elements GDP 1% Median case: Achieve 3% growth in excess of general + market growth over next 5 Share Inflation 2% of years Growth Premia Gp. Sales + In high quality business 30% Secular market growth 5% 15% Changing Technology 5% No precision to the 10%
Slide 82: Quantified some turbulent scenarios
Quantified some turbulent scenarios What we know: 150 25% Revenue Margin 140 Not yet back to 2007 activity Base = 100 130 20% 0.8% 120 1.5% +3% 1.2% +2% 110 15% Good current growth rate 1.0% +1% 100 0.2% MEDIAN 4.7% -1% 90 10% -2% 80 -3% Bodycote growth 6% 70 60 5% History shows 5 -10% setback
Slide 83: A changed Bodycote
Summary and conclusion A changed Bodycote Bodycote targeting good growth but also able to withstand a downturn Robust margins Enhanced return on capital Good cash generation 83 Growth & Resilience - a recap
Slide 84: Growth & Resilience
Growth & Resilience Stephen Harris, CEO