Bodycote Stock

Good morning, everyone, and thanks for joining us for our 2026 half year results. I'm Jim Fairbairn, the CEO; and with me is our CFO, Ben Fidler. And I'd like to do some brief introductory remarks. I'll set the context and give some highlights, and then I'll pass to Ben to go deeper into the financials. And I'll then come back and talk about how we are continuing to make progress in executing the strategy, and then I'll end with a comment on the outlook. So to start with the highlights, we are pleased with our good performance in the first half.

We are on track and on plan. We've reported core organic revenue growth of just under 10% and we'll see strong demand in aerospace and defense and also IGT. Medical has also returned to growth. All of this has more than offset continued softness in automotive. And as we said we would, we have delivered margin improvement on the back of volume growth and our successful Optimise repositioning and restructuring.

And I'll talk later about the pace of progress on Optimise and how we intend to go further. So in summary, we are on track and pleased with progress in the first half, and we are happy to reconfirm our expectations for the full year. Let's look at the growth and also the momentum across the group. Across our total core markets, revenue grew 9.6%, and this was made up as follows: Aerospace and Defense revenues grew almost 25%, reflecting the strong demand across OE and also aftermarket. And this was particularly led by surface treatment on commercial engines. Industrial markets grew slightly as expected, but remains fragile.

At the same time, we have continued to see softness in automotive. It was down 4.4% with weakness across most areas of our portfolio and especially Western Europe. And then energy, which was up 4.7%. And within that, IGT revenues were up over 10%. Our oil and gas business has stabilized after significant contract wins in 2024. And then we also saw strong revenue growth in consumer, medical and other. It was up 14.8%, driven by semiconductor demand and a return to growth in medical. So in overall terms, you can see the strong performance of some of our end markets more than offsetting the softness in automotive and the good sequential growth, notwithstanding the softer prior year comparator. This then gives us the confidence that we are on track for 2026.

I'll talk more about this later. And with that, I'll pass to Ben.

Well, thank you, Jim. And just to add my welcome to all of you. Thanks for what I understand is a reasonably busy morning this morning. So good to have you with us. I'm now going to step through in a little bit more detail just some of the key elements of our financial performance for the first half. Then I'll also touch on some of the more detailed aspects of our technical guidance as to what you should expect for the full year 2026. So let's start, as you can see here, with the key highlights.

Overall, a good performance in the first half that was in line with our expectations. I think the highlights were good levels of organic revenue growth, core margins that were up despite some cost headwinds we incurred in the period, strong EPS growth. Good level of cash conversion and a balance sheet that remains in good shape and a good level of capital return to shareholders through a combination of the dividend and the ongoing GBP 80 million share buyback.

Now let's dive into the numbers on the next slide in a little bit more detail. Firstly, in the top table here, you can see focusing on the ongoing core business. Core revenues were up 9.6% organically, reflecting strong growth, as you heard from Jim, across aerospace, defense, industrial gas turbines and medical markets. Core operating profit rose 11% organically to GBP 60.4 million, with core margins up 30 basis points to 16.2%. Although underlying core margins progressed much more strongly than this, -- that was impacted in the first half by variable pay, which normalized after an unusually low level in 2025 as well as the cost drag on some of the new program investments that are ramping up as we've opened a number of new sites and are transferring work to those.

Each of those elements, the variable pay piece and the new investment ramp-up had about 100 basis point impact on the margin in the first half. Secondly, and in the lower table, you can see the numbers looked at through the group lens, which includes our noncore business, the noncore activities that we're exiting from. Revenues at that level were up 6.5% organically to GBP 381.2 million. Group operating profit, GBP 61 million with margins of 16%, up 110 basis points on the prior year. and that reflected the benefits from the Optimise program as well as the reduced revenue scale of our low-margin noncore activities.

Adjusted EPS, as you can see here, rose a strong 18.3% to 25.2p. And the interim dividend was increased by 4%, providing an increase to shareholders whilst also helping us to rebuild dividend cover. And now to look at some of the key drivers of the group's operating profit performance. I'm going to cover the details behind the divisions in a moment. But as you can see here, divisional profit rose by a combined GBP 7 million from our 2 core divisions, reflecting that strong top line growth in Specialist Technologies of 16% as well as the good growth in Precision Heat Treatment of 8% -- the benefits from Optimise ramped up further in line with our expectations with around GBP 2 million further profit improvement delivered in the first half of the year.

And you can see those optimized benefits land in both the Precision Heat Treatment division as well as in central costs. Noncore profit, as you can see here, reduced by GBP 1 million on a GBP 23 million reduction in noncore revenues, reflecting the execution on site closures and disposals. Overall, we're pleased with what we are achieving and delivering on the Optimise program, all of which is turning Bodycote into more of a rightsized, better utilized and more efficient group. And the first half numbers, as you can see here, I think, show this quite clearly.

Group revenues up 3% in total and up 6.5% organically with that leaner and more efficient cost base, enabling us to deliver that top line growth, while at the same time, having 1% reduced labor cost on 4% lower headcount and 2% reduced utility costs with a 10% over a 10% improvement in energy intensity, all of which combined has enabled us to deliver that group margin improvement of 110 basis points year-over-year. Now let's turn to look at the performance of our 2 core divisions in a little bit more detail. Firstly, with Specialist Technologies, you can see here, which delivered a strong performance. Revenues up 16.7% and profit up almost 17% organically. very much led by the 37% growth in aerospace and defense revenues, which is now 50% of this division's revenue base.

We renewed 2 important long-term agreements with customers in the period with 2 sizable U.S. Tier 1s. Although energy overall as a market was up only 2% in terms of revenue, that masked a much stronger 17% growth in industrial gas turbines, which largely offset the 15% decline we experienced in oil and gas markets. Those oil and gas declines are now easing as we work our way through the difficult prior year comps. Medical, which you also may remember was softer last year, now back to growth, up 15% in Specialist Technologies in the first half.

Industrial and Automotive, you can see here, smaller parts of this division, representing only 20% of combined divisional revenues. but these markets remain challenging in the year. Margins overall for the division, healthy at 26.1%, up 10 basis points. Next, turning to Precision Heat Treatment. On an organic basis, revenues up just over 6%, led again by the strong growth in Aerospace and Defense, which was 16% in this division. And operating profit rose just over 5% organically with margins stable at 15%. Industrial, which represents about 25% of Precision Heat Treatment divisional revenues, was up 3.6%. That was effectively stable on an underlying basis, which was then boosted by the optimized revenue transfers. And Automotive, 26% of our Precision Heat Treatment division remained challenging.

And here, even with the benefit of some of those optimized revenue transfers from noncore into core, the organic revenue decline here was 4%, reflecting the ongoing structural challenges that a number of our automotive markets face, particularly in Western Europe. Let's turn to cash flow, and the group delivered a good level of cash performance in the first half, operating cash flow of GBP 41.6 million, up almost GBP 4 million over the prior year. That reflected the high level of EBITDA year-on-year, some temporary phasing effects on CapEx, which saw CapEx actually modestly lower in the first half and a working capital outflow that reflected the strong organic revenue growth.

Operating cash conversion overall was stable at 68% versus the prior year. restructuring spend, as you can see here, increased to GBP 9.5 million as we'd expected, reflecting further execution and delivery on the Optimise program. Cash tax was up GBP 5 million versus the prior year. That reflected a lower level of tax refunds that we had benefited from in the first half of 2025, and we expect a much more balanced H1, H2 pattern to cash tax this year. Overall, left free cash flow at GBP 14.5 million, about GBP 3.5 million lower than the prior year. Now let's turn to look at capital allocation. We ended the period with net debt of GBP 135.2 million, leverage still low at 0.7x.

We very much maintained and will maintain our balanced approach to capital allocation. So in the first half, that saw us deploy GBP 33.5 million on capital expenditure, close to GBP 28 million on dividends to shareholders and close to GBP 18 million on the share buyback with just over GBP 12 million deployed on the new GBP 80 million buyback that we launched in March. On M&A, we closed one transaction in the first half, not a huge acquisition at GBP 5.5 million, but Spectrum Thermal Processing is a very nice business, a nice quality addition to our U.S. aerospace footprint and capability, and it's performing very well. And we continue to build the M&A pipeline, as Jim will touch on a little bit later.

And finally, an update on some of the more detailed technical guidance points for 2026. So I'm not going to step through all of these, but just to flag the 2 or 3 that have changed since we last presented this to you in March. Firstly, CapEx. Continue to expect it to be higher year-over-year with a ramp-up in the second half, reflecting project phasing. For the full year, we now expect CapEx to be at or towards the lower end of our GBP 80 million to GBP 90 million previous guidance range. Secondly, finance cost, small item and a small change, but around about GBP 10 million, a little bit lower than we previously guided.

And finally, tax rate expected to remain in line with the first half 23.5 percentage points level, which is about 100 basis points lower than we'd originally flagged in March. And as a reminder, as you model margins for the second half, do bear in mind those 2 headwinds, which we'll maintain, variable pay as well as the new investment ramp-up costs. At the same time, we expect further volume leverage and further Optimise improvements to come through in the second half of the year.

And with that, I'll hand back to Jim to update more on strategy and on outlook.

Thank you, Ben. So we'll continue to make further good progress executing on our strategy. As you know, it's focused on 3 key areas: Optimise, where we have been successfully carrying out a major portfolio rationalization and are now looking to go further. Perform, where we are driving margin improvement through the deployment of Lean. Our Lighthouse operational excellence sites are now up and running, and we are very much in the rollout phase. And growth, which is all about being smart with our capability and capital and a focus on commercial wins and M&A. Let's look more closely at the benefits we're getting from the Optimise program.

The program delivery is on track. We expect the majority of the planned footprint actions. That's 29 out of 31 sites to be completed by the end of the year. We're really pleased with the results. The financial cost saving benefit last year was around GBP 4 million, and we expect the same again this year. with a full run rate benefit of at least GBP 15 million by the middle of 2027. So with the sale of the French sites, the net cash costs will be around GBP 10 million to GBP 15 million. We have now a successful playbook for this activity, including ensuring that we retain the revenues that we want. A lot has been done and some of the more straightforward and obvious consolidations, where there were clear opportunities have been done. We are exploring potential options to expand the program and go even further.

And this is focused on the parts of our auto business that remain in structural decline, and we'll have more to say in due course. Then on to perform. I'm also very happy with the early successes that we're seeing and in particular, from our Lighthouse sites. These are 4 sites that we've set up to act as intense training hubs. So we've launched our Edge Lean system and are fully deploying it in our showcase sites. And people around the group can visit these sites and see what excellence looks like and absorb the key learnings and carry best practice into the rest of the organization. So let's look at one example in Lighthouse site #1. It's a very large site. It's a U.S. site. We've set ambitious 2-year targets in areas such as turnaround time and also margins.

And after 3 week-long Kaizen events, already we've achieved a 30% reduction in new product introduction lead time. We have 4 of these Lighthouse sites, 2 in the U.S. and 2 in Europe. And from there, we're rolling out processes to other sites. And of course, this kind of implementation leads directly to better customer experience, better productivity, more capacity and ultimately better margins. So we're continuing to execute on the strategy, and I'm very happy with the recent progress. And obviously, driving these efficiencies and margin improvement is a good foundation for future growth. At the core of our strategy is to drive -- sorry, is our drive to improve the quality of the portfolio.

We've already made significant progress over the last 2 years. We have prioritized areas where we see higher growth and exited lower grade, more commoditized segments plus we have integrated 2 quality acquisitions. As you know, our target end markets comprise aerospace and defense, IGT, medical and also electronics. And these now account for 48% of group revenues and are seeing good growth. 2 years ago, they were only 35% of group revenues. But we're not finished yet. And our key priority is to go further to improve portfolio quality, setting us up for strong underlying growth with organic acceleration plus investment.

It's supplemented by more M&A, together with driving further on the Optimise program. Lastly, to cover outlook, we are mindful of the geopolitical and macroeconomic situation, but our full year outlook remains unchanged. We expect to deliver core organic revenue growth led by aerospace and defense, IGT and also medical. The pace of growth will moderate in the second half due to the comparatives. We also expect to increase our group operating margins as we see increasing benefits from our Optimise program. This success in Optimise and our focus on perform and grow also mean that we remain confident in the delivery of our medium-term financial targets.

So with that, I'll say thank you and then open up to questions.

So we'll start with Andy and then Jonathan.

Three questions, please. Can we start with Optimise? Clearly, we're making good progress, but you've tempted us with the opportunity for some maybe some more optimized. Can you just give us a flavor for maybe the scope of what you're thinking about for the next leg of what may come within that Optimise expansion and maybe timing and just basically how you're thinking about just a bit more detail.

Second question is on the M&A pipeline. Clearly, Spectrum is a nice little deal. We've had activity in the market with Kitty Hawk recently going. So I was just wondering, your pipeline apparently is building quite nicely, but there's broader market activity. So just really a bit of a flavor for how you're seeing the M&A backdrop. And then lastly, one for Ben. We've got some variable costs coming back into the business, as you guys have discussed in '26. How does that flow through to '27 and '28? I'm assuming that you still have a bit more in '27 and then it all kind of disappears by '28? Or should we not get too excited about '27 and '28 because there'll be more greenfields, more investment in Specialist Technologies? I just want to make sure that we're not getting too carried away or maybe we should.

Okay. I'll take the first 2 and then Ben can take the third one. So in terms of Optimise, I mean, we're still doing the work and analysis. I think we're a month or 2 before we really decide where we're going to go with that. Two things I would say. I think the first thing is that we're responding to markets that remain structurally challenged. And I think that's a good thing. I don't think we anticipated previously the depth of that structural challenge. And so I think the fact that we're responding is actually positive.

The other thing I would say is that we have more conviction on being able to execute and Optimise. We -- so in my prepared remarks, I mean you have heard that we said that we were on track. We put a lot of program management and focus and team focus around being able to execute that. The model just isn't closing site, it's also about retaining revenues. We also said previously that we would remain, I mean, agile. And I think that's a very important point. I think the last point I'd make is that, as Ben alluded to, with a lot of the low-hanging fruit within the organization, especially within AGI, I mean, has all been done.

So as we look out for potential further restructuring, consolidations, then it will be a bit more difficult. So you shouldn't necessarily expect the same returns. But at some point, Ben can update on that. On acquisitions, I mean, we continue to build our pipeline. Our preference always is not to be part of a process and build the relationship, build the relationships through time, through family-owned enterprises, and that's what we're doing. In fact, the man sitting next to your left is now responsible for M&A, and he's doing a good job about building these relationships.

It is our aim every year to do several acquisitions. As you know, it's dependent on negotiations. Sometimes these are opportunistic. I think what you'd want to know is that we have a funnel, we've got an active funnel. All of us in the leadership team are tasked with looking at new opportunities and building new relationships, making business cases and that is all actually happening. And it needs to be aligned to the strategy as well, which -- so acquisitions are very much part of the strategy going forward. It's a big focus within the company, within the Board.

And I'm confident in the short to medium term, we'll do more. It couldn't be happier with the integration of the Spectrum in the Lake City. I think both of these are actually outperforming which is actually true. And I think that's a testament to the team who've actually taken over and also the process that we build behind them. And it's the same rigor process and identifying and nurturing the pipeline. So I'm confident that we'll do more at some point.

Should I pick up the one on the new project investment costs, your question on that, if I've understood it correctly. So firstly, just a quick context set. Remember what's behind those. It's some of the -- if you wind back to the slides that we shared in March, you've got new site in Mexico, S3P Greenfield in South Korea. You've got some A&D site expansions and replacement of legacy sites in the U.S. and also some additional HIP capacity that we're putting in 2 sites in the U.S. and 1 site in Europe. So there's quite a bit on our plate at the moment around some of these things, which is necessary for lots of good reasons because we want to drive more growth in the business.

At the same time, we're also going to be mindful that financial alchemy is not entirely possible. And it means in the early years, as you carry out those investments and those new sites start getting up and running, there is a cost to doing that. As we alluded, it's probably around about 100 basis points to margin headwind in the first half, stays at about that level in the second half. That clearly starts to abate as you go through '27 and '28. It won't all go away in '27. -- chunk of it does, chunk of it goes away in 2028. It then does depend on the second half of your question, is there more new investment coming thereafter? There will be a bit more.

But at the same time, as you go through '27 and '28, you've got the building elements of the drivers coming from more savings on Optimise, perform starting to deliver and hopefully some ongoing volume growth in the underlying markets. So I'd think of it in that way. It probably is -- it's a combination of a hump in those investments and the variable pay rebalancing. Now that variable pay piece, that doesn't unwind in '27. It's found a new base level. It's back to its normal base level, I should say. And therefore, that doesn't unwind, but it just hopefully doesn't get worse.

Three questions from me as well, please. Firstly, can I just come back to Optimise and obviously increasing the scope there. You're going to focus on the areas that are structurally challenged within industrial and also automotive. Can you just break out how much of industrial you think is structurally challenged and also how much of automotive is structurally challenged as well? And like you say that in terms of payback, it is going to be lower, but can you just give us a feel for what kind of levels of payback we could get on the next round?

That was the first one. The second one was just in terms of North America industrial. Obviously, it has lagged. It's lagged the PMI that isn't really picking up. I think we would have expected that to be better. I know there's a mix effect there. Can you tell us what parts of Industrial and U.S. are really sort of holding you back there? -- and obviously, the views into the second half?

And then the third question, just in terms of one of your smaller end markets, but semicon, obviously growing really well. Can you just give us a flavor for the growth of that business in H1? And what can you do to really expand your exposure to semicon within Bodycote?

So let me take the first one then, Ben. In terms of Optimise, we're very much saying that the structurally challenged area of the business is actually automotive. And let me put some color to that, Jonathan. We're down 4.4%, as we say, but it is a different picture in some regions. And I mean, hopefully, this will give you some color and kind of point you to what we're thinking. North America, Eastern Europe and Turkey showed actually modest growth during the period. Western Europe was actually down high single digit.

So that leads us to the -- where I'd say one of the focus areas that we are and will be looking at going forward. China was also down. I mean, light vehicle production was actually down 5%. We were down slightly more than that. But if you look at P5 and P6, there's a bit of a recovery in China. So I think we're not really saying industrial, we're really focusing on auto. Ben can come back about the payback in a second. I'll take the North American industrial. If we look at it on a kind of global basis, the submarket 50% of our industrial markets is in machinery manufacturing. That was just flat to slightly down, whereas tooling and steel and also construction and agriculture were actually slightly up.

So that's where we are as a total industrial market. And actually, America, if we look at the kind of regional, Europe was actually slightly up. North America was actually down. Our kind of key weak spot in North America was actually heavy truck and bus equipment. That's really the industrial supply chain to that. That's really where we saw the weakness. Do you want to take the payback question?

Yes. and semis as well -- so look, on the payback, as you saw on the slide that we shared on screen earlier, the payback on this program has been actually very good, I think, with around about a 1:1 in terms of the net cash cost to achieve and the expected profit benefit that we're still ramping up to deliver, but confident that we will deliver that at least GBP 15 million improvement by the middle of 2027. Of course, with the initial program scope that was also helped from a net cash cost perspective by the fact we were able to package off and sell those French sites, which brought in around GBP 19 million of proceeds and would have been far more expensive had we closed those.

I think in terms of orders of magnitude, it's hard to be too precise because at the moment, the scope of the program is still being worked out. So it would be premature for me to sit here and come out with a number on payback. However, as Jim mentioned, it won't surprise you that the lowest hanging fruit was achieved and delivered in the first stage of the program. That's not to say it won't be attractive. If it's not attractive, we wouldn't be doing it. But it's probably more likely to be somewhere in that arguably 2 to 3x range between cash cost to benefit. It still gives an attractive payback, but just not as low-hangingly attractive as the first stage.

But it gives us time to work it through. We need to do more work to precisely define the scope of it, precisely define the reach of it and the execution mechanism as to how we do it, which through closures, potential disposals, combination of those. And as Jim mentioned, we'll come back to you later in the year when we've done that work and when we're ready to give you some more concrete numbers on that. On semis, your question on that, Jonathan, look, it's growing nicely, not surprisingly. I think it was up about 25% or something in the first half.

It is a relatively small part of the group. It's about 2% of revenues today in semis. And with some very niche exposures that we have there in the chip manufacturing supply chain process for equipment, capital equipment that goes into chip manufacturing through 2 or 3 different parts of processes, a bit in S3P, a little bit in Precision Heat Treatment and a little bit in hot isostatic pressing. It's hard to grow dramatically organically in that, but it's probably more likely through some -- if there are selective M&A opportunities. And there is one early stage in that area.

It's very small, but that we're looking at. And the likelihood is if it is M&A in that, it will be through pretty small bolt-ons. But there is one in the pipeline at the moment that we'll see where that one gets to that would further enhance our reach into some of the electronic components and semis with more of an aerospace and defense bias to it.

It's Harry Philips of Peel Hunt. Just a couple of questions, please. The -- just thinking about the M&A environment, and you've got 2 sort of well-known competitors who've set out very clear agendas to expand in similar markets and what have you. So just wondering, against that backdrop, you've got a whole list of companies in the states. Many of them I was actually looking at the list the other day. I mean, I think 8 of the top 15 are family-owned still and what have you. So I'm sure they're also wining and dining all the same people. So what's the Bodycote proposition apart from cash to get those family businesses into your portfolio rather than other people?

And when you look around capital allocation and you say you've got these competitors wanting to grow at a real rate, just sort of do you feel you need to sort of reappraise how you sort of execute there? And then secondly, just looking at the chart, which you very nicely sum up, Jim, where I think it was 48% of revenue come from those high-growth markets. So let's say, those high-growth markets can do you mid- high single digit, that should mean core Bodycote grows at 3%, 4% with no growth in industrial, auto under pressure, et cetera, et cetera. I mean is that the sort of -- I mean, if you go back to the Capital Markets Day in December '24, that sort of puts the capital market sort of proposition almost at sort of low case, if you like, given if you've got short 50% sales in higher-growth markets.

Is that too simplistic or negative headwind am I missing in that, please?

Okay. Well, let me -- thanks, Harry. Let me take the 2 of them and Ben can comment on the second one as well. I think in terms of M&A, I mean, we are very selective. Kitty Hawk got mentioned earlier. We knew the owners of Kitty Hawk. We spoke to them, but we decided actually not to bid for it for different reasons. I'm not going to go in there. So we are building every relationship that you would expect us to build, okay, with all these family-owned companies. And then we, as a team, take our ideas to the Board. We have a big debate and it's how it should be. I think what a family companies, I think, like from Bodycote is that we're the market leader.

We take a real interest in the longevity of actually their asset. We talked to them. I always ask the question, why are we the best buyer? And therefore, we actually articulate that to the family company. And we have some good opportunities in the medium to long term of actually working with family-owned companies because we got a lot of currency on people, talent, development, how we think operationally, service levels, make sure that we serve the customer. We spend a lot of time actually doing that. So I think building that relationship is actually very important. The one thing that I've learned, we've been doing this for 25 years is that you can never tell a family company when they have to sell, they will decide.

And that's actually why someone early on in my career said, you've got to you've got to wear out shoe leather. And that's what Parrish, who's sitting there. That's what we do, and we all do trips. Ben, everyone, I mean, to build these relationships. So I think the proposition for us is actually definitely around being the market leader, our values, our people and why we have been able to articulate the reason why we are the best buyer. And maybe Ben could add to that in a second.

Your second question around pretty much -- we said at the Capital Markets Day, mid-single-digit growth through the cycle. One way to get there is exactly what you're saying. Half the business is in higher growth markets. And through time, that will increase. So you're not missing anything. I think we will continue to pivot the portfolio through time to increase that percentage, and that's a reasonable proposition. If you want to add anything to any of these 2 questions.

I think just on the medium-term growth, mid-single-digit point, the only dimension I would add -- and I can't fault your math much as I'd love to, on half the business is serving markets that are growing 6%, 7%, 8% per annum long term. I mean, let's also remember aerospace, brilliant growth, IGT, very strong growth. But if you look out 5 years plus, you can't extrapolate the first half performance forever. But nonetheless, they will still be significantly higher growth than a number of the other end markets. But it gets you to maybe that 3% to 4% you talked about.

The other dimensions just to throw into the mix is that auto is it really going to grow? And certainly, this is where the Optimise expansion program that does mean you maybe need to feed into your overall mix, the fact that potentially the scale of our core revenues may have a little bit of a further reduction as we put more businesses into noncore in the event of an expanded Optimise program. Now that doesn't diminish the future rate of growth, but it just depends on your revenue start point when you're working out where your CAGR is that you maybe need to lower it before you then have more of that confidence around mid-single digit, maybe even slightly higher than mid-single-digit growth in the longer term if you had a portfolio that was even more biased towards aerospace, IGT, medical, semis, et cetera.

I guess is if you start to take -- let's just use auto as an example, you start to take some revenue out of that. And is that then the capital allocation on the other side has got to be -- if M&A is sort of driven by the sort of factors outside directly your control, do things like buybacks sort of get accelerated as a consequence of that because you sort of -- if you raise funds through focus and concentration, leverage is obviously undemanding where you are, et cetera, et cetera. So the balancing item on capital allocation, does a drop in auto come with a rejig to broader capital allocation?

Well, I think it fundamentally depends upon how we can execute an expansion of the Optimise program. Your question inherently assumes it will be through disposals that release capital. I hope it might be. But as you can imagine, you're looking at selling some of these businesses with an end market mix that may not be quite as favorable from a disposal perspective as your question might allude. But that doesn't mean we're not going to try damn hard. But it depends how you execute the program, whether it's through disposals or whether it's through closures and consolidations. In reality, it may be a mix of the two.

Tom Elgar from Deutsche Numis. I think 3 sort of areas I just want to ask a question on. So I think starting on A&D. I mean, clearly, very strong growth at the start of the year. I think it would be great if you could touch on the pricing contribution as part of that and whether you can disaggregate the volume and sort of 2 parts of that. And I guess, secondly, on A&D, thinking about any additional color you can provide on market share within the first half, obviously, very strong in the business and obviously, the changes that you've made, Jim, in terms of the sort of go-to-market strategy in A&D. So it would be great to sort of get an update on that. So I'll pause there and come back.

Okay. I'll take the second part of that, Ben. So in terms of market share, what we've done in the last 18 months is actually really strengthened our aerospace and defense team. We brought in a new President. She has changed probably 75% of our team. Part of that was to bring in a head of Commercial that works with all her front line, really bringing new process and talent into looking at our commercial organization and go-to-market strategy and also how we win business.

And the business -- so the aerospace and defense business had been suffering a little bit from some service level issues. Well, they have all been resolved now. And Ben referenced major renegotiations of LTAs, both very much in our favor, and that will bring us market share. And so I'm very confident that we have the rigor in terms of commercial focus just around the aerospace and defense team, and it's obviously showing within the numbers. Now obviously, the majority of that is actually market growth. If you think of the beginning of actually last year, there was congestion in the supply chain 4 months earlier, we had the Boeing strike. We didn't have an easy first 3 or 4 months last year.

And I think aerospace and defense during the half year last year grew 3%, yes. So obviously, we're not -- the second half we're going to moderate as you would expect. But we've actually professionalized, I mean, that whole team. But clearly, the majority of that is a rising with the market. You want to talk about pricing?

Yes. I think it's some of the similar themes in the volume versus price. I wouldn't have said there is anything particularly out of the ordinary in aerospace pricing in the first half of the year. It's in line with the normal sort of price trends you'd expect from our business, which is sort of in that low single-digit percentage, low to mid-single-digit percentage. type of level. It was predominantly volume and particularly some very strong volume growth in -- from customers like GE, where we do a lot of the surface treatment work there. So our surface treatment and surface technology business in aerospace saw very, very strong growth, a lot of which was boosted by GE activity on blade throughput on programs like LEAP, which was up more than 50% in terms of LEAP GEnx blade volumes.

Just moving on to the IGT side. Obviously, really nice to see the acceleration there. And just, I guess, asking more broadly in terms of what's driving the acceleration in terms of are we seeing a greater alignment to obviously the higher rates of growth within OE within the mix of the work that you do in IGT? Or is this obviously the pressure we're seeing within the industry given the rates of growth and the end customer demand that we're seeing that there is more outsourcing demand, and therefore, that trend is continuing as the new sort of greenfield/excess capacity, that debate you guys obviously are well positioned to help your customers through with that. So I guess just trying to unpack that trend with IGT.

Yes. I mean we're obviously very, very happy with our IGT growth. It's growing with the demand. There has been -- we -- primarily in the U.S., but not all, there has been some -- especially second half of last year and slightly into the beginning of this year, a challenge in the supply chain. We believe that with some of our customers, household name customers, that they had problems getting castings and a whole lot of things.

That has now moderated. And obviously, going into the second half, we expect to continue to see like really good growth, especially in some of the larger IGT models that we service in the U.S. I think there's also a lot of experimentation and change around additive manufacturing that we're also seeing in some of our sites, especially in Greenfield, like where we do both -- it's a site really apart from Derby, we've got a site with a combination of technologies, and we're expanding the amount of stages that we can actually work within the customers.

And so I think we see this as one of the most exciting areas of the business, and we expect -- we don't -- growth isn't 50%. It's just over double digit. That kind of thing, I think, would be a reasonable outlook for the next 6 to 18 months.

And then just lastly, I mean, touching maybe a market we don't talk about very much, but nuclear, obviously, we've seen the end markets there improve. I know it's a small market for you guys. But I guess just could you remind us of your sort of go-to-market opportunity here, I guess, looking at the pipeline, has that changed? I know this is very high-margin work. if you were to do some new greenfield activity, it would be reasonably contributing.

Yes. As you say, nuclear are very small. We work with like some of the household defense nuclear people, we manage our pipeline through the commercial organization.

Yes, I think on the nuclear power side, you're right. We do have exposure and doing a reasonable chunk of work on nuclear power plants used in naval applications. It's a nice business we serve out of the U.S. For -- I think your question is probably more about the commercial nuclear and maybe some of the growth in small modular nuclear reactors. It's a potentially very interesting long term.

We're working and the teams are working hard to build inroads into the developing supply chains of things like the Rolls-Royce SMR. We work with Rolls-Royce very closely. We are accredited with Rolls-Royce's submarine business, which does the nuclear power plants on the U.K. Navy submarine vessels. So we're a logical partner for them to use. The reality is I don't think your forecast model probably goes far enough out to capture the revenue potential on that, not being cynical or skeptical about it, but the rate of ramp-up in that is very exciting on a 10-year view, probably very, very limited on a 1- to 2-year view and marginal on a sort of 5-year view. It will be there, but it will take time to build. But we are actively pursuing it, but you've got to recognize it's long lead time stuff.

Just quickly on that. So you would say that refurb work, for example, in civil nuclear is something we probably shouldn't expect because obviously, we've seen a significant change in refurb volumes.

Yes, we do. We benefit a little bit of that. We have some unique assets that service some Framatome work in France on that, as an example. But is it a big part of the business? It's not a huge part of the business today. It's a nice part of the business. It's a nice high margin. We've got some quite unique assets that do that. We operate under a long-term agreement for some of that stuff. But yes, is it enough to really move the needle? Probably not.

[indiscernible] Asset Management. So in your outlook, you mentioned you're expecting to deliver group margin improvement. Would you commit also to core margin improvement for the full year?

Yes, should I pick that one...

Please.

So look, I mean, the outlook comments are clear. Core revenues will grow organically. Group margins will expand. We don't guide explicitly to core margins. You saw what happened to core margins in the first half. I would have said I would assume the level of improvement will continue to be far greater in group margins for the full year than it will in core margins.

Jamie Murray from Bank of America. Just on Aerospace and Defense, clearly, it's growing really well and you provided some good color. Just looking ahead, how do you see that growth evolving into H2 and in 2027? And then secondly, like is there -- as part of the Optimise program, do you guys -- or is it possible for you to convert like automotive sites into aerospace and defense sites? And if so, like what are the costs associated with that?

I'll take the second question, Ben, and you can follow on with the growth. So the answer to the second part of your question, can you convert sites? And the answer is actually yes. Now it's not always as easy as rolling up and becoming an aerospace and defense site, and that's a good thing. But we do have -- we, as a company, can do it. We understand the accreditations, the processes and stuff. We are actually in the process of taking a site in Athens, Georgia, which was an automotive site that was part of the Optimise and converting it to an aerospace site so that we can serve the sort of Huntsville, Alabama space area and the supply chain around that.

That's a 12- to 18-month program. It's a completely new set of assets, mainly vacuum furnaces. You have to get industry accreditation. You've got to get customer accreditation. So I think it's quite an involved process. You've got to make an investment -- but the team -- the aerospace and defense team are actually really excited about that because they see the potential. We've also done that in other sites over the years of bringing in aerospace work. Like, for example, Parish in Turkey has actually pivoted to one of the sites at Gebze to be able to take aerospace work. But that takes a lot of know-how and process know-how and know how to get the accreditations, which is all about quality, traceability, reliability, being able to heat treat within parameters that traditionally automotive and general industrial heat treaters can't do.

So we're in the process of actually doing that. Now extending that to include Specialist Technologies like, for example, HIP is even a step above that. So I think we do have a natural moat around our aerospace and defense business, okay, which we're very happy with and is actually working to date.

Yes. So look, let me pick up on the aerospace and defense question or a commercial aerospace question. First half growth, 25%. It was against a comp base that was a little low last year, particularly Q1 last year, where you had a lot of supply chain ingestion. Aerospace had been up 3% in the first half of last year. The comps do get significantly tougher. So just mathematically, that means I wouldn't expect that level of 25% growth to continue in aerospace through the second half. It will moderate a fair bit, but still remain good, but moderate a fair bit.

Look, it's too early for us to guide in detail to anything around 2027, but you can look at the same numbers that we look at around the improvement and increase further in OE build rates with probably somewhere between an 8% to 10% increase in build rates for narrow-body and wide-body programs in 2027 at Airbus and Boeing as well as ongoing growth in aftermarket, maybe at a slightly lower level, but somewhere in the sort of mid- to high single-digit percentage level, which is where aerospace then sort of hits the cadence for '27 and '28 at that sort of level.

Anyone else?

Thanks, everyone. Thanks for coming.

I appreciate you being here. Thank you.

Good morning, everyone. And thanks for joining us today for the 2025 Bodycote full year results. I'm Jim Fairbairn, CEO; and with me is our CFO, Ben Fidler. And I'm going to give some brief introductory remarks and that will set the context and give some highlights. I'll then pass to Ben to go deeper into the financials. And I'll then come back and talk about the important progress that we've made on the strategy and how we're positioned and how we see the outlook.

So you'll remember, we set out to firstly build a quality extended leadership team; secondly, significantly reposition and restructure the business; and thirdly, deploy from our Capital Markets Day, which, as you'll recall, was focused on optimizing the quality of our business, performance and growth. And in conditions which were challenging in some of our end markets, we've delivered a significant amount last year.

In terms of the highlights, revenue momentum improved in the second half, more of that in a second. And the most important to me is the quality of the portfolio. We've been executing at pace. We've sold 10 sites in France and closed a further 8 sites and also made a strategic aerospace acquisition on the East Coast of the U.S. This is a first sign of a more bolt-on acquisitions to come. And on top of that, our balance sheet remains healthy. Today, we're able to announce a further GBP 80 million buyback that we expect to complete by the end of 2027.

So all of that puts us in a position for 2026, where we expect to drive core organic growth, margin growth and further drive the strategy for the medium term. And as we flagged last year, we saw improved momentum in the second half, and that was primarily led by aerospace. Core revenue, although flat for the year, was up 3% in the second half. In Aerospace & Defense, growth accelerated throughout the year, and it was up 14% in the second half. We saw good growth in Aero HIP and in engine parts.

And Industrial and Automotive both remained challenging. Both improved in the second half, but were modestly down year-on-year. North America was more resilient in auto, but softened in industrial later in the year. And Europe was the opposite, weak in auto all year, but the comps became easier in industrial.

In Energy, we saw a significant decrease in available oil and gas work as well as customer-driven project delays. And this has led to around a 25% reduction in revenues. Industrial gas turbines, on the other hand, was up 6%, and we expect further strong order growth this year. So despite that backdrop, there is a really important point that I want to emphasize. And what we've done and are continuing to do is to increase the quality of the portfolio. We are laser-focused through a combination of targeted organic investment and also bolt-on acquisitions as well as closures and disposals through the Optimise program.

And the chart on the left shows that it will take Spec Tech from around 1/4 to around 1/3 of the portfolio post Optimise. Further growth focus is in all 3 of the technologies through organic capacity investment and also regional expansion. And our target is to get Spec Tech to 35% to 40% by the end of 2028.

And on the right, the chart shows our faster growth markets. These include Aerospace & Defense, Medical, IGT. This will reach 45% post Optimise, and we expect these markets to become the majority of the portfolio by 2028. This stronger foundation gives us the confidence for this year and also the medium term.

I'll talk more about this later. With that, I'll pass to Ben.

Well, thank you, Jim. And just to add my welcome to Jim, thanks for joining us this morning. I'm now going to spend a little bit more time stepping through in some more detail the key elements of our financial performance for 2025 and also touch on some of the more specific points about our 2026 guidance and outlook. So let's start on this slide with the key highlights of the numbers.

As you heard from Jim, in mixed end markets, we delivered broadly stable core revenues for the year, down 0.3% organically. As Jim outlined, though, we did see a much stronger level of organic revenue momentum in the second half of the year than we did in the first half. Core margins, you can see here, down 160 basis points to 16.8%, but still a good level. Again, a decent improvement in margins in the second half compared to the first half. Reflecting the lower operating profit and the higher tax rate, EPS fell to 44.4p. Cash conversion remained very healthy at 78% despite a significant increase in the amount of CapEx compared to 2024.

And finally, the balance sheet remains in good shape with leverage close to the lower end of our target range, leverage at 0.6x at the end of December, whilst having returned GBP 100 million to shareholders through a combination of circa GBP 40 million in dividends and GBP 60 million in share buyback.

Now, diving into the numbers in a little bit more detail for you. Firstly, focusing on the ongoing core business. Core revenues, you can see in the top table here, broadly stable, down 0.3% organic. And that reflected a modest fall in volumes, offset partially by increased pricing. Reflecting the market environment, along with mix headwinds, core operating profit fell by 8.5% to GBP 113 million. That's that margin of 16.8% we saw on the last slide.

And secondly, in the lower table, if you look through the group lens, so including those non-core activities in the non-core division, revenues were GBP 727 million, down just over 2% organically. Group operating profit, GBP 114.3 million, which equates to a margin of 15.7%, down 130 basis points. Adjusted EPS, down 8.6% to 44.4p. A few dynamics going into that. Clearly, number one, the lower level of operating profit, modestly higher financing costs as leverage went up and an increase in tax rate. Of course, those were partially offset by the lower share count from the share buyback execution. Despite the lower EPS, full year dividend was held at 23p, continuing our 38-year track record of maintaining or growing the group's dividend.

Next, I want to look at a high level in terms of the key drivers of our operating profit performance in 2025. I'm going to cover the specifics behind the divisional detail on the next couple of slides, so I'll try not to duplicate. But as you can see here, Divisional profit fell a combined GBP 12.8 million. What was behind that? That reflected the lower oil and gas volumes in Specialist Technologies and the weak Industrial and Automotive environment, primarily in Precision Heat Treatment. Non-core profit, as you can see here, was GBP 2.2 million lower. That very much reflected just the execution as we closed sites and as we disposed of those French businesses in November. And we're now over halfway through the Optimise actions. That program is going really well.

The benefits from Optimise ramped up in line with our expectation, and I think, in line with your expectations as well with GBP 4 million delivered in the year, mostly in the second half. We delivered about GBP 1 million in the first half. These benefits, where do you see them? You see them partly in the central costs on this chart, and you also see them buried within the Precision Heat Treatment divisional performance. They probably split roughly 50-50 between the 2. And finally, FX had just under GBP 2 million headwind to profit, primarily on movements on the euro and the U.S. dollar.

Let's now delve into the performance of each of the 2 core divisions in a little bit more detail. So firstly, Specialist Technologies, where performance in 2025 very much reflected and was shaped by the weakness in the oil and gas markets, where revenues -- oil and gas revenues in Specialist Technologies were down 40%, impacted by the end of significant customer project work. This saw revenues in the division, you can see here, fall 3.7% to GBP 212 million. If you exclude that oil and gas effect, underlying Specialist Technologies revenue was up 2%. And trading momentum in this division was much improved in the second half, both in terms of revenue and in terms of operating margin. What drove that was very much led by Aerospace & Defense, which saw a significant acceleration in the second half and up almost 15% for the year in the Specialist Technologies division.

Industrial and Auto, worth mentioning, they are much smaller parts of this division, but these were challenging markets in the year. Margins were lower, really impacted by the fall in the very high gross margin oil and gas project work that we experienced. But with margins at 27.1%, we think still at a very good level and clearly will improve from here, as we look forward. So looking forward to the 2026 for this division, we'll see a return to organic growth as the year-on-year oil and gas headwind abates. We expect continued good growth in Aerospace & Defense and industrial gas turbines. And as we also start to see some of the revenues on some of the new investments that we've been making over the last few years in Specialist Technologies ramp up.

Next, turning to Precision Heat Treatment. On an organic basis, revenues were up 1.3% to GBP 459 million, with growing volumes of industrial gas turbine work within the Energy segment and accelerating growth in Aerospace also seen here in the second half of the year. As Jim mentioned earlier, Automotive and Industrial end markets remained challenging with some marked differences between the different geographies, Europe versus North America. Although comparators did ease as we went through the second half for both of those end markets. We took a number of actions to manage the cost base, but reflecting the weak industrial and auto market backdrop, margins in PHT fell by 150 basis points to 16%.

Now, as we look forward to 2026, we do expect Precision Heat Treatment to capitalize on further good growth in Aerospace and good growth in Industrial Gas Turbines, although Auto and Industrial markets are probably likely to remain challenging.

The group delivered robust cash flow with adjusted operating cash flow, you can see here, GBP 88.6 million. That was lower year-on-year, but that reduction reflected 2 real things. Firstly, the lower level of operating profit; and secondly, the increased level of capital expenditure, as we invest to drive growth in our target strategic end markets and our target strategic processes. Overall, operating cash conversion was still healthy at 78%. Restructuring spend, you can see here below the operating cash flow line, rose materially to just over GBP 14 million. That was expected and reflects the ongoing delivery and execution on the Optimise program.

Now, of course, that number excludes the GBP 19 million of disposable proceeds on the sale of the French auto and industrial sites, which is reported below the free cash flow line. Put it all together, and overall, that left free cash flow at GBP 47.5 million with year-end net debt at GBP 105 million, leverage at a very comfortable level still.

And that kind of leads us on to the next slide where what we've tried to do here is give you some more detail and a little bit of a broader picture as to how we think about capital allocation, how it fits with our strategy and how we have used it and will continue to use it to drive shareholder value. So let's move clockwise, start in the top right-hand corner.

Firstly, the Optimise program, investing in the near term to deliver and execute on the program. It's progressing really well and is creating, no doubt about it, a better quality Bodycote. Additionally, it's also released some capital through that disposal of the French sites, which we then redeployed and recycled into other parts of the business that are more aligned with our go-forward strategy.

Secondly, driving continuous improvement through the Perform program. You'll hear more from Jim on that shortly. It is starting to ramp up, and we've got a good level of confidence and conviction that, that will deliver meaningful financial benefits to the group over the next 3 to 5 years.

Thirdly, we continue to invest selectively and with discipline to deliver the strategy, increasing the focus we have on our target strategic end markets, Aerospace, Industrial Gas Turbines, Medical and in Specialist Technologies and at the more differentiated end of Precision Heat Treatment. And that is going to be through a combination of organic growth as well as M&A and where we are building the pipeline nicely.

And finally, shareholder returns, last but not least, a blend of regular dividends and additional shareholder returns as and when appropriate, with GBP 100 million returned to shareholders last year through this, and you've seen today a new GBP 80 million buyback program announced, all of which continues to be supported and enabled by Bodycote's strong balance sheet. We've got leverage headroom to allow us to execute on all of these priorities for capital allocation, and by using them all selectively and carefully to drive growth, improve the quality of Bodycote and deliver returns to shareholders.

And finally, the long-awaited technical guidance slide. I know results season wouldn't be complete without it. Just a few points that I'll draw out from this as you build your models and build out your forecast for 2026. Firstly, FX. Based on current rates, probably a small positive impact on revenue, very little impact, probably no impact on profit. Secondly, for non-core, bear in mind, you've got the disposal of the French sites together with ongoing closures that mean non-core revenues are going to fall quite significantly in 2026. Thirdly, CapEx, we're going to continue to invest selectively and with discipline, but we will be investing more as we want to drive growth in those right areas of the business. And as we continue with the buyback, share count will reduce. You can see the numbers here, interest costs probably modestly increase.

And finally, as I think many of you have already seen from some of our detailed guidance comments in the release, 2026 will be a year for a return to core organic revenue growth and margin expansion. But as you model margins, do bear in mind that variable pay could create a headwind of potentially up to 100 basis points in 2026 as this returns to more normalized levels after what has been a relatively low level in 2024 and in 2025.

And with that, I'll hand back to Jim.

Thank you, Ben. In terms of the strategy, we are executing at pace, 2025 was an important year for milestones in all of the Optimise, Perform & Grow. So let me talk you through where we are. Optimise actions are increasingly behind us. We successfully carried out this major footprint rationalization, and it's already delivering financially and in line with expectations, as Ben said.

We're dialing up focus on Perform & Grow. As you'll recall, Perform was actually designed to improve performance, productivity, customer experience and profitability. And it also improves the foundation for growth. I'm very pleased with the progress in 2025, and it's also great to see the teams so engaged in this area.

With Grow, we are focused in multiple areas. Internally, we've increased our commercial capability and also resources. And we've realigned our market-facing business development areas to maximize customer opportunities. Additionally, we are investing significantly for future organic growth, mainly in the U.S. and Southeast Asia and in our most attractive end markets. So let me take you through each in more detail.

With Optimise, I couldn't be happier with the approach and the execution of the team. You can see from the timeline, overhead reductions are almost complete. We're over halfway in terms of site consolidations, and we'll have exited 85% of those 21 sites by the end of the year. We have now a successful playbook for this activity, including ensuring we retain the revenues that we want if needed again.

As Ben said, the financial cost saving benefit last year was around GBP 4 million. We expect around the same again this year in incremental benefit with a full run rate benefit of at least GBP 15 million by the end -- sorry, by the middle of next year. As I mentioned, around 10% of our sites in 2025 had some kind of a lean or productivity improvement pilot.

Here's one example of the many pilot projects. This is our Hebron site in Cincinnati. It's a surface treatment site, and it does a lot of IGT work. They are growing, and they're also running out of space. So we completed a 4-day Kaizen event in Q4 last year. Kaizen events are very intensive short-term workshops that problem solve a specific process issue. In this case, it was the transportation of parts. Travel per week in parts was reduced by 5 miles. So this obviously meant a reduced lead time through less process crossovers, therefore, giving more capacity for growth.

What you see on the chart is the before and after flow, and you see a far less complexity and an easier platform for growth. We also had observers from different sites there, and it's also created a momentum from the event where people -- so it's not created a pull factor for other sites. And I should actually reiterate that success in this area is hundreds of small incremental improvements that add up and you also develop a problem-solving muscle and you create a culture of continuous improvement. And from that, you drive productivity, differentiation, growth and also competitive advantage. It's a well-worn path.

We've always had some elements of best practice within Bodycote. It just wasn't coordinated, and it certainly wasn't part of our culture. So on the left, you can see some elements of the pilot program. We have a toolbox to train people on. I talked about Kaizen events. We've also simplified some of our productivity metrics.

The right side shows our progress. We are 60% complete in terms of foundational work, and we've spent a lot of time with our plant managers training and developing them, and we are ramping it up this year. We've just recruited new regional capability. I talked about the pull factor we've got from the other sites, and we're developing 4 lighthouse sites, 2 in North America and 2 in Europe with the full suite of tools. These projects are actually really important. We are on track to deliver a margin improvement of 100 basis points from Perform by the year 2028 and more thereafter.

Let's come on to how we drive faster growth. Last year, we spent a lot of time laying out the foundations to drive faster growth in the next few years. And of the 5 columns on the chart, the first 2 are linked. We've looked at the way that we're structured, in particular, the sales structure. We've looked at the way we work across divisions, and we've done a fundamental reboot. We've improved sales capability. We've set up cross divisional groups such as one on European defense, and we've challenged our general managers to drive new growth.

The middle column is all about growth investments. I'll talk about that in the next slide. And the right 2 columns are accelerants to the strategy. I'll cover both in the next few slides. All of this together will enable us to deliver our goal of mid-single-digit growth through the cycle.

So let me give you some more tangible Grow examples. Across these projects, we're investing more than $60 million between '25 and '26. Firstly, the new S3P expansion in South Korea, it's the first time we've taken this outside the Western areas of Europe and North America, and we go live in the second half of the year. And we will service the Korean, the Japanese and the Chinese markets from this site and with the room in the site to develop it even further.

The second one is we're adding new HIP capacity in the U.S. and also in France. The picture you can see is from Greenville, South Carolina, which is now a multipurpose aerospace site, where we're targeting the growing additive market.

The third example here is we are moving 2 aerospace sites that were frankly substandard. Both also have significant growth potential. One is in Cincinnati, and the other one is in Los Angeles.

And fourthly, our 2 Mexican automotive sites are close to full. So in the north of the country, we're putting in a new plant, which will meet the rising demand of our supply chain.

These are just some examples that gives us the short- and medium-term confidence in growth, and we expect to see revenue growth from all of these projects by the end of the year.

So our first accelerant is sustainability. As I've said before, you'd expect us to drive energy efficiency. This is even more important than ever. We've made more progress in 2025. In fact, we've driven energy intensity, that's energy usage against revenues down by over 1/4 in the last 5 to 6 years. Energy focus is a large theme in our general manager conferences.

On the right, the chart shows our activities on the drivers of outsourcing from our customers with some new offers now. For example, we've now 5 net zero sites. And all of these broadens our proposition to our customers. And so we've built a solid pipeline of sustainability opportunities, and we're looking to make progress on this in 2026. Sustainability remains one of our important strands of our growth strategy.

I'm very happy with the progress that we're making in M&A. Ben talked about the importance of recycling capital. We highlighted the French disposal that completed a few months ago. In January, we were pleased to announce the acquisition of Spectrum. I actually visited the site as part of the diligence process, and it's a great small business with a great team. And it also gives us access to some new aerospace supply chains. We're actively working our funnel and have a number of opportunities at different stages of development. Our aim is to add small- and medium-sized bolt-ons that are aligned to the strategy of improving our portfolio.

So coming to outlook. This year, we expect to return to organic core growth. That will be led by strong growth in Aerospace & Defense and in IGT. And I couldn't be happier with the team and their focus there. We expect Industrial, and particularly Auto, to remain challenging. Clearly, there is a subdued economic backdrop and macro environment and geopolitical uncertainty. We'll deliver improvement in operating margins through volume growth, better mix and our self-help work. All of that means that we'll drive strategic progress, keeping the momentum to deliver a high-performing, resilient and faster-growing Bodycote. We also remain confident in our medium-term financial targets.

With that, I will open up to questions. So if you're in the room, if you could raise your hand, and online, please post your question. Thank you.

Andy, we will start with you, if you don't mind.

Of course. I've got loads of questions, but I'll start with 3, and then, I'll come back if the other ones haven't been answered. Firstly, can we just talk about the Middle East, your exposures there? If you can just remind me where you're positioned and where you play. And I appreciate it's difficult, but any kind of early thoughts on how you're responding to what is currently a difficult situation.

You talked about it very briefly, Jim, for the second question on M&A. The buyback is reasonably self-explanatory, but I just want to understand kind of the narrative around buybacks and M&A. And if you can maybe just go into a bit more detail about the funnel, and how that's progressed over the last I guess, 12 months, quality, size, any thoughts on pricing?

And then last, but in no means least, probably one for Ben. Energy, my understanding is you're pretty well hedged from an energy perspective given what's going on with oil prices and broad energy prices. Can you just remind me, a, where you're up to on that; and b, the broader policy for the group?

Okay. Well, I'll kind of start, Ben can maybe take energy and the buyback. So in terms of the Middle East, our direct sales there are only 1% of our portfolio. We don't have any infrastructure. We don't have any people. We don't have any plants in that area. So thankfully, that is our position.

In terms of the terminal way that we look at that, I mean, you'll know that energy cost is around 10% of our revenue. It's about GBP 70 million. Just to put it in context, labor is 40%. So -- and I'll say this before Ben says it, Ben and the team have done an amazing job at being more intentional and also structured around energy hedging. And certainly, for the next 2 quarters, we're in really good shape. We're very pleased with that. Ben can go into some of that detail.

Then, obviously, we've -- it's actually well known that we've managed significant energy spikes through surcharges previously. Now, we do surcharges all the time. It's not just energy surcharges. Like, for example, in Los Angeles, we do environmental surcharges that are passed on, et cetera. So we have a well-oiled process around surcharges. We still actually do some energy surcharges now. So we will take the right decision on actually how we manage that going forward.

I'll briefly talk about M&A and then pass to Ben. In terms of M&A, Spectrum, I mean, really was the first acquisition that the new team were involved in. Lake City was finished just before I joined the company. I think the integration of Lake City has gone fantastically well. I couldn't be happier with that. I really liked what I saw at Spectrum. It's a very small acquisition in terms of over 80% Aerospace & Defense opens up Pratt & Whitney supply chain. We're very, very happy with that. It's a great team. And it's already fitted. So the plumbing aspect within Spectrum is already in place. In fact, the new General Manager there was at the General Manager Conference at Dallas, we had last month, and he fully engaged. It's as though that they've been there a long time. So that's very positive.

I think in terms of Spectrum, $8 million; Lake City, $50 million. I think we have a range of targets between these 2 bookends. And certainly, as we look at the funnel, we've got over 50 targets at various phases within the funnel, some at the top end of the funnel. So we're very, very focused in terms of wanting to do more acquisitions as part of our capital allocation -- balanced capital allocation that Ben will talk to in a minute. It's a huge focus. In fact, we've just recruited a consultant to help us in terms of Aerospace & Defense.

So -- yes, I'll pass to you, Ben.

Yes. So just picking up on a couple of those with a little bit more color, but you've given a good picture, Jim. Thank you. On hedging, we've got -- we're very pleased with the level of cover we've got for the next 2 quarters. It does start to tail off as we go through the fourth quarter, but -- and typically, in a business like this, we haven't got much hedge cover for 2027, but that is intentional, actually. We don't want to be over-hedged in the future. That can create problems in and of itself.

And what I would add is a bit more color that we -- our hedging that we have for the next 2 quarters, if anything, we have a much higher bias to that hedging in Europe than we do in North America. Sometimes you've maybe got to be lucky as well as being smart, but I'll take either. So that does leave us in a better position, certainly, where we've seen the big spikes in European gas prices and no doubt electricity prices. Let's see how long the conflict goes on for. As Jim mentioned, we have used surcharges in the past to protect our economics as a business. It's never easy to put pricing up to customers. It's very much let's wait and see, see how things develop over the next few weeks, but it's something we're monitoring very closely as to whether we may need to revisit doing that to protect our economics.

And I think on your second question about the narrative around both the buyback and M&A, what would I add to what Jim has said? I suppose, look, what we want to do is we want to grow the business. We want to prosecute and execute the strategy of not just growing the business, but growing the business in the areas that are more differentiated, higher growth, Specialist Technologies, Aerospace, Industrial Gas Turbines, Medical, et cetera. And at the same time, we're very mindful of wanting to manage rightly for shareholders the risk/reward balance, which argues to some extent, a share buyback and the attraction of a share buyback at the valuation that we're at today as well. But we are wanting to do all of those 3 things and balance all of those 3 things.

And what I'd also add is that with leverage at 0.6x, you can do the math, if our target is within a range of 0.5x to 1.5x, that additional circa 1 turn of leverage gives us a little bit more than GBP 200 million of firepower to do stuff with. So that gives us more than adequate capacity to do this GBP 80 million buyback and to give us a good pool of funding to execute on M&A. And of course, the business is going to be generating free cash flow over that 2-year period as well. So we do believe that it genuinely gives us optionality to do all of these 3 things with hopefully the right balance.

Jonathan, you want to?

It's Jonathan from Barclays. I just have 2 questions, please. The first one was just on Industrial Gas Turbines and the outlook there. Can you just sort of talk us through just in terms of what you're seeing or how much revenue visibility you have within that business? Do you feel that you need to add capacity to sort of service the forthcoming demand? And also, is there opportunities within that business or within Industrial Gas Turbines to push your specialist technologies further into that than it currently is?

And then, the second question was just in terms of the Optimise and the remaining GBP 11 million of benefits to come through. How does that split out? Is that half of that again go into the central cost charge, the other side go through into Precision Heat Treatment?

I'll take the first question. Ben, if you can take. So as we said in the prepared remarks, IGT grew 6% in 2024. We expect that it will grow faster, expect it will grow more this year. Now, there has been a little bit of supply chain constraints, I mean, that we've seen in some of our plants, especially in North America. I referenced the Hebron site there, which is in Cincinnati. It primarily does IGT. We've just actually set up an extension to that facility, primarily for IGT work. So we are doing a lot of both IGT and additive manufacturing related as part of long-term agreements. And so, as we see the market ramping up and supply chain constraints easing, then we are confident that we will grow with that.

So in terms of Spec Tech, the wider question around Spec Tech, I come back to how we were very siloed driven in terms of sales and business development. Internally now, we're actually very different, so between North America, all the Specialist Technologies and also the Precision Heat and Aerospace & Defense. And all of that is actually shared within single business development silos now and not individual silos. So we -- one of our -- like for example, some customers were complaining we -- in a single flow, we had to give them 2 invoices, which is just like crazy because one was Specialist and one was Precision. That's all gone.

So I think internally, we were creating barriers potentially internally. And certainly, when I met some customers at the Paris Air Show, that's what they were telling me. So we've tried to really focus on to make us a seamless service. And I think we'll start seeing the benefits, not just in IGT, but in the wider aerospace space actually this year.

Should I pick up on the one on Optimise? So yes, you're right, GBP 4 million delivered, GBP 11 million -- at least GBP 11 million to go. You saw Jim's chart on the shape and profile of that GBP 11 million to go, GBP 4 million or so this year, probably GBP 4 million to GBP 5 million to deliver in 2027 and then the remaining tail in 2028. Where do those benefits feed in of what is left? I'd draw you to that -- again, the Optimise chart that Jim shared. The majority of the overhead on the timeline. So the majority of the overhead actions are done. There are still some left, not that many. Those that are left are in more of the divisions. There's not further overhead action left in central costs. And therefore, there's a bit in the divisions from overhead.

The remaining piece of the Optimise benefit is more going to be driven and felt from the retained revenues and the benefits, the drop-through benefit from where we retain revenues by moving work from a closed plant to another Bodycote plant that is proximal, but a much higher drop-through. To state the obvious, that will be in the divisions, predominantly in Precision Heat Treatment.

I'm Tom Elgar from Deutsche Numis. I think 2 topics for me. I think the first one is, I just want to pick up on your comments, Jim, just about the reorganization the business is having in terms of market facing on the business development side. Clearly, there's a concerted effort to leverage the network more fully across the business. Should we be expecting to see LTAs rise across the portfolio? Does all this lead to some more formal integration of Bodycote into supply chains of your key strategic customers, thinking about A&D, thinking about IGT, as mentioned previously? Some comments on that would be great.

And then the second part of that, which perhaps leads on is, could we extend that into how we're thinking about pricing across the portfolio? I think you mentioned tailwinds this year. How far along in the journey do you think you are in terms of valuing the new Bodycote more appropriately given the new capabilities and capacity and value you're bringing?

Yes. Okay. Well, I'll kick off. So the first thing, what was obvious as we looked at the internal makeup of the company in terms of business development sales is we had internal barriers that weren't actually helping us. That was the first way that we looked at things. We weren't really sharing information across the whole from a kind of end market point of view because we've got technologies and we've got end markets and we've got regions.

And how you navigate through that -- every company has got the same issue, how you navigate through that is either going to define you or actually not define you. So I think that was important. We don't necessarily see a significant increase in LTAs. We do -- because there is a -- sometimes there's a trade-off in LTAs, where you want the business, but you're up again -- the trade-off is that you can't sometimes have to be quite sharp on the pencil in terms of actually price.

I think the price that we saw was that we were potentially missing opportunities not being through the whole way through the value chain. So a part would come into one of our sites, Precision Heat Treatment, and it would go somewhere else, whereas if actually we can control more of the stages of the process, that's kind of really where the price actually was. So I'd say that we've been okay at kind of leveraging our network, but we haven't been great at it. And certainly, the new business development, and execution and organization, we've actually put in place realizes that.

And we've got -- so I talked about Greenville being an aerospace center of excellence, so it does Precision and also HIP, right? Now, that's a minority. But we also have other HIP sites that have precision heat treat capacity that just weren't really leverage. So we weren't really leveraging our network. So I think there is a bigger opportunity here to sweat our kind of assets and also regions where we didn't really fully focus, especially in aerospace rather than in IGT.

So I think that will take time to come through, but it is actually part of the growth focus we now actually have within. And I think the final thing I would say is that -- I start with the team because we have a new President of Aerospace & Defense and Energy, and who I think some of you met at the Capital Markets Day. She's actually -- 50% of her team is actually new. We've really top graded the teams from my team through the divisional teams. So we have really hired for growth and actually where we're taking the business, which I couldn't be happier with.

Do you want to talk about pricing?

Yes. So look, I think on the pricing piece, look, I mean, pricing -- your customers never embrace you with open arms about price increases or at least not most normal customers. But as we move forward, I think the business historically has a good track record of being able to push through annual price increases. In some years and in some markets, that is harder than in others. And clearly, if we think back to 2025, in Automotive & Industrial, let's face it, it was tougher rather than easier. Pricing went up, but it was not an easy discussion.

As we move forward, I think there's 2 aspects around our pricing that I would flag. And I suppose at its heart, your ability -- any business's ability to price incrementally is supported by differentiation and value add, isn't it? And so the more differentiated we are, and the more value add we can provide versus our competitors, it puts you in a better position to price. And that is also a core part of the strategy. Differentiation doesn't entirely equal Specialist Technologies, but it does, and it equals the more differentiated ends of precision heat treatment. And that is the way the portfolio in the business is increasingly shifting. That will help our pricing bias.

And secondly, value add, it comes back to Jim's point about where we can aggregate, leverage, bundle some of our services in a way that some of our smaller stand-alone competitors who might just provide single processes can't do. And, therefore, by being able to do more of that and extracting more of that opportunity, which historically the business has not been as good at as it could have been. I think that should also help our ability to incrementally price as well as win more volume. So look, I think pricing is never easy. It won't suddenly change. But history says we can price. And as we execute the strategy, I think it enhances our opportunity and chances there rather than reduces them.

It's Harry Philips, Peel Hunt. Sorry, you're hiding there, Jim. I can't quite see. Three questions, please. Just first of all, on the Perform sort of initiative, just trying to get an understanding of -- I mean, clearly, you set out the example in Cincinnati about how you've improved the flow through the plant. But to really get towards that 100 basis point improvement, how much is sort of additional revenue dropping through that improved, more efficient cost base? And how much is cost in its own right, i.e., if there were no growth, what would Perform add, and maybe it's over detailed, but just an idea of the sort of sensitivity. Is it more a cost or more a sort of revenue drop-through aspect?

The second is the second half organics, which were pretty punchy, but probably against softer comps in '24. So we're looking into '25, is there any reason we should sort of restrain our enthusiasm for sort of running those forward, particularly as the oil and gas sort of balancing item abates?

And then lastly, on the variable consideration, sort of guidance, you've given, it'd be quite interesting to know the assumptions you've made. Is that a Performance? I'd say it should be quite interesting to know the assumptions of what drives that, maybe it will be in the accounts later, but quite interesting.

Okay. I'll take the first one, and Ben can take 2 and 3, Harry. Well, thanks for that. Perform is actually really focused on improving productivity and also process efficiency. That's really the nub of it. So you get improvements, and you get cost improvements. And I would always say that you should always aim a target at more cost improvements because they're much more certain and in your control. So I usually say that should be 2/3 to 3/4 of the -- talking about sensitivities.

But if we go back to why we did Perform in the first place, I think that's important. The first thing is I've now been at 67 sites, and all of them have got something to offer other sites, and it's all different. So if we can aggregate that and look at different best -- it could be furnace loading, it could be the way that they marshal the visual side of things. And we weren't capturing that. And that comes down to either process improvement or productivity, which is really a function of actually cost.

So last year, we hired a new Head of Continuous Improvement, who joined us just before the half year, actually. Previous to that, we were running a few pilot programs, but he's an ex-Danaher guy, unbelievable what he's achieved in 6 months, running full pilot programs, not just in the U.S., we did a couple in France. We did one -- I think -- so we did one in France that reduced our kind of lead time by 40%, just like a single Kaizen event. So we haven't done these before. So the opportunity plus all the VP group, which is kind of one before -- one below presidents, there's about 23 VPs. They couldn't be happier to get involved in like learning new skills and capability.

And I think the final comment I make is it's a methodical rollout. I've been through this like so many times. People learn something, then they fail on the implementation because they have -- they don't really know the subtleties. So this is actually why it's a multiyear program. You learn by doing -- actually, you learn by failing so that -- the process actually doesn't really improve. And so you do it again, and you learn something, and then, you build the skill set around that.

So I think -- as I think about it, mainly cost focus, okay, which is good. So if we grow, we could get incremental benefit, not that Ben will allow us -- allow me to say that. But we -- there's a real momentum here, and we trained everyone at the General Manager Conference on safety and how we're thinking about safety, quality, delivery cost. And it's -- we're really creating a movement within Bodycote, but it takes a long time to roll out.

Sorry, it's a bit of an extended answer, but it's just like so important that we build this in the company. Sorry, over to you.

No. Thanks, Jim. So I'll take your question on the second half organics, and I would never wish to stand between you and your enthusiasm, Harry. It's a dangerous place to be. But look, I mean, you're right, so first half, minus 3.5%; second half, plus 3.2%. What drove that improvement in the second half, in particular, strong acceleration in Aerospace & Defense, decent growth in our Industrial Gas Turbines that also picked up in the second half compared to the first half a little bit. Still challenging markets in the second half in industrial and in automotive, particularly U.S. industrial, as you heard from Jim. And oil and gas that in the second half was still probably at the group level down 20%, 25% in the second half.

So as you roll forward, you're kind of saying, well, look at our outlook statement, look at where we're steering to individual end markets. And you're kind of saying, well, Aerospace, Defense, IGT, continuation of those kind of trends, good growth, strong growth. Industrial, probably remains challenging. Automotive, if you look at global light vehicle production, I think that probably remains quite challenging. But the oil and gas feature, which washes through from a comps perspective, certainly once we get to the end of the first quarter, starts to go away.

So I think that gives you some sort of boundary conditions as to well, okay, as you fly forward, what sort of level of organic growth do you think the business might be capable of delivering in 2026? That's going to be your call, I'm not going to tell you what number to put in. But that gives you some conditions as you look at those end markets, you look at what we delivered in the second half, and you say that, that oil and gas headwind starts to diminish. It's only 5% or 6% of sales in oil and gas, right? But it's nonetheless helpful rather than unhelpful.

And your third question, remind me your third question, sorry.

Just on the variable consideration, you sort of put a number in there of sort of GBP 7 million to GBP 8 million. And it's just to understand if that's sort of formulaic against operational performance and...

Yes, it is -- it's entirely -- well, 80% of it is driven by operational financial -- it's driven by financial performance in terms of variable metrics. There's 20% of our -- for the whole organization where it's driven by your personal performance, but 80% is financial performance. You'll see when the annual report comes out what the level of payout has been for Jim and I at least, and that trickles down through the organization. Everybody is on the same kind of approach and metrics.

And what we're saying is for 2026 from a planning perspective, inevitably, our planning assumption is we hit our budget. 2025, we did not hit our budget, as you'll see when the annual report comes out, and that's hardly a state secret in terms of where the numbers landed. So yes, the headwind, if we hit our budget, that's the 100 basis point of headwind.

And then sorry, just one -- very final one on CapEx. How much of CapEx is maintenance? And how much -- I'm again coming back to Perform, how much would be sort of not necessarily just Perform, but growth CapEx for want of a phrase?

It probably splits, kind of 60-ish percent is maintenance, 40% is growth.

And on Perform, there's like minor CapEx. We're looking at some automation projects, and -- but it's noise around the edges.

Can I follow up with a quick few questions? It's Andy from Jefferies again. On IGT, are you broadly agnostic to from a customer base perspective, large versus small, et cetera? Or do you guys play in specific areas or with specific customers?

On Perform, 2 really quick questions. You talked about a $50 million -- sorry, $50,000 total cost to implement. Are you able to give us what the benefits were from that spend? And just on the foundational versus advanced in terms of the rollout, from an idiot's perspective, as you know, Ben, it would appear that the foundational bit is the, I would say, more standardized, quite straightforward to roll out across multiple plants, yet the advanced is going to be quite complicated because every plant is different. Does that also bring with it the same amount of benefits, i.e., the foundational bit gives you a good start, but the advanced is where you get the majority of that 100 basis points of margin?

Yes. Let me take these. In IGT, we are at the larger end of the IGT range. And without -- I'm not going to mention customer names here, but they're household names. And we've got good relationships. In fact, we even do some R&D for some of them. So we're -- that's -- it certainly answers that. You talked about the $50,000 of that cost. That's just moving machines and just going about.

In terms of actually benefit, the team usually, initially, within 3 months, it pays back and then gathers momentum after that. So it's very, very short. The investment Ben talked about was more about headcount because we've had -- so we now have regional CI leads, Europe just started a few months back, and their purpose is to work with the lighthouse sites and also train the VPs and also general managers. And in the lighthouse sites, we're recruiting dedicated CI people as part of the process, but they'll report into the general manager. So there's a kind of structure there. So very, very quick payback.

In terms of your foundational and advanced, you're absolutely right. Foundational is almost like a baseline of actually continuous improvement. So 5S, making sure that workspaces are actually clean -- shadow boards, everything is to hand. You've got a daily management system, which is safety, quality, delivery cost. And so if an issue comes in and you're problem solving that. So this is just the baseline stuff, which actually in terms of safety and some of the quality delivery and cost, we're actually very advanced through the whole portfolio.

What we have internal targets that I tell the presidents, we should be looking to deliver 1% operating margin per year in improvement projects. Now, you never hit that, but you've got enough initiative to drive that, and there's always bumps in the road. In terms of advanced stuff, that's where you -- so we'd look at error-proofing, and it's called poka-yoke, which is not a joke.

The -- so we'd look at error-proofing. You'd look at changeover times. You'd look at different ways. You'd look at where you can really have advanced visual management, like they call them like water spiders, where someone actually comes in and moves stuff around stations because of the condition of a visual representation. So these are all advanced stuff, and they'll all be in the lighthouse pilot programs. And we've got the team that can deliver that.

Any other questions in the room? Yes.

With regards to your Aerospace & Defense end market, do you see yourselves growing alongside delivery numbers for Boeing and Airbus? Or could you go above those numbers for this company?

Yes. I mean, what we're guiding to, obviously, last year, Aerospace actually grew 8%. And we -- so what we would say is that we're looking high single digit, a low double digit in both Aerospace and Defense. That's our guidance. I think some of the numbers that I've seen on deliveries are slightly higher than that, I think, from what I remember. So -- but that would be the level that we'd actually look to guide it. It's never a straight line year-on-year. There's -- we hear about different supply chain congestion. We talked about it in IGT earlier. There's still some in Aerospace. So that -- I think we're comfortable talking about that.

Is that volume growth or volume and price with that high single digit?

Volume growth.

Yes. The other dimension, just to feed into that, is for our Aerospace business, it's more exposed to original equipment, and therefore, OEM build rates. Your question is kind of a very good question. But it's probably about 60% OE and about 40% that's driven by the aftermarket. So you've got to look at it through the blended sort of average of both of those together.

With that, we'll call the meeting to a close. Thanks very much. Thank you.

Thank you.