Business review

Markets

In the first half of 2012, the civil aerospace market was buoyant, as expected, and saw a continuation of the increase in aircraft build rates. Demand for aircraft spares was stable. The Boeing supply chain has seen particularly strong demand, both in North America and France, driven by 737 and to a lesser degree by 787 output. The defence market for Bodycote's processes, which is not dependent on major new programmes, has been flat. Bodycote's sales in the aerospace and defence market rose 19.2%3 compared to the first half of 2011.

Oil and gas demand has been strong in both North America and Europe, with first half 2012 sales 32.0%3 ahead of the prior year. While requirements for gas fracking were subdued in Q2, total rig count remained at a high level, so there was little impact on Bodycote. The industrial gas turbine market has continued to grow at a reasonable pace, with Group sales up 4.7%3 compared to H1 2011. The growth rate was similar in both North America and Europe.

Market performance in car and light truck has been markedly different between North America, which has continued to see increases in output, and Europe where production has fallen. Bodycote sales in this sector are weighted to Europe and Group sales were down 1.8%3 compared to the same period last year. The geographic pattern is similar for heavy trucks but Group sales overall were higher than the first half of 2011 by 1.2%3, as growth in North American demand was particularly strong.

Sales to the general industrial sector grew by 21.4%3 in North America compared to H1 2011, with much of this coming from mining and agricultural equipment. European demand from the early-cycle segments has weakened and this has been exacerbated by lower growth from exports to Asia. European general industrial sales were 1.9%3 lower than the first half of 2011.

Demand in emerging markets in the first half has been somewhat weaker than we had expected at the beginning of the year.

Aerospace, Defence & Energy

Revenues for the Aerospace, Defence and Energy business (ADE) were £130.3m (2011: £115.9m), an increase of 12.4%, of which 9.5% was organic. Expressed at constant currency rates the increase was 12.6% with organic growth at 9.7%.

Headline operating profit was £31.3m (2011: £25.2m), an increase of 24.2%, and operating profit was £30.1m (2011: £25.1m), an increase of 19.9%. The headline operating profit margin improved from 21.7% to 24.0%. Net capital expenditure was £15.6m (2011: £7.2m), representing a spend rate of 1.7 times depreciation (2011: 0.8 times depreciation). Average capital employed for the period was £228.6m (2011: £220.9m).

Capital investment has continued in both the USA and Europe to increase capacity in HIP, including for HIP Product Fabrication capability, to support sales development in aerospace, industrial gas turbine and oil and gas markets.

Automotive & General Industrial

Revenues for the Automotive and General Industrial business (AGI) were £171.0m (2011: £172.3m), a decrease of 0.8% which was in part due to the weakening of the Euro. Revenues are lower by 2.6% on an organic basis. Expressed at constant currency, revenues were £178.5m, an increase of 3.6% and organic growth was 1.9%.

Headline operating profit was £22.8m (2011: £22.9m), a decrease of 0.4%, and operating profit was £22.1m (2011: £22.5m), a decrease of 1.8%. The headline operating profit margin was maintained at 13.3% (2011: 13.3%). Net capital expenditure was £9.5m (2011: £12.3m), representing a spend rate of 0.6 times depreciation (2011: 0.8 times depreciation). Average capital employed for the period was £262.1m (2011: £288.5m).

3 Stated at constant exchange rates.

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