The macro-economic environment in the first half of 2015 was challenging, including a significant downturn in the global oil & gas markets, which sharply reduced demand from this sector in the second quarter. This has had a knock-on effect in a number of the general industrial sectors, in particular the agricultural equipment market, and added to the challenge. However, this environment has provided an opportunity to demonstrate Bodycote's resilience. Revenues decreased by only 1.1% at constant exchange rates, although adverse foreign exchange movements led reported revenues to decline by 4.0%, and headline margins1 remained steady at 18.0%. Headline operating profit declined by 1.4%, at constant exchange rates, and by 3.6% to £54.1m, after the impact of a £1.2m adverse exchange translation effect.

Mitigating the declines in oil & gas and related general industrial demand was the continued strong revenue growth (at constant exchange rates) in car & light truck (+7%), aerospace (+4%) and much of the specialist technologies businesses. However, oil & gas weakness adversely impacted parts of the specialist technologies businesses, particularly Surface Technology.

Margin stability was achieved despite a 250 basis points contraction overall in Aerospace, Defence & Energy (ADE). Offsetting this was an improvement in Automotive & General Industrial (AGI) margins, coming both from an expansion of margins in classical heat treatment and the continued growth of the specialist technologies. This was particularly the case in Europe, where there has been a sustained business improvement effort to drive margins up towards those already achieved in North America AGI. The growth in Europe AGI classical heat treatment margins contributed some 90 basis points to the Group margin.

With the marked economic decline in Brazil and any pickup in opportunities in oil & gas markets in the region looking quite distant, the decision was taken to close our business in Brazil. It is anticipated that the exit will be complete by the end of the year. An exceptional charge of £11.0m has been taken at the half year to cover these exit costs. In the first half, the Brazilian business reported an operating loss of £1.8m.

In addition to the exit from Brazil, an additional £8.9m restructuring charge was taken to reduce fixed costs and to rightsize operations elsewhere in the Group. The cash cost of all restructuring actions is expected to be £12m. The annualised benefit of all of the restructuring is expected to be £10m, with the full impact in 2016. Operating profit, after deducting reorganisation costs of £19.9m, declined by 41% to £32.1m.

Capital expenditure of £29.2m in the first half was 1.1 times depreciation (2014: 1.2 times). Some 60% of the capital expenditure expands our capacity, predominantly in the specialist technologies, China and Eastern Europe. Net debt at the half year was £7.0m (31 December 2014: net cash £35.7m), after payment of the 2014 final and special dividends, totalling £57m, with the Group generating £20.6m (2014: £32.1m) of free cash in the first half.

The Group's strategy remains unaltered. The drive for operational efficiency in the more mature parts of the business, expansion of the Group's footprint in rapid growth countries and the focus on growth in the higher value-added businesses, particularly the specialist technologies, are all designed to increase the quality of the Group's earnings and create significant value.

  1. Headline operating profit as a percentage of revenue.