Bodycote – the modern blacksmith

Bodycote – the modern blacksmith

Founded in the UK in 1923 as a consumer textiles manufacturer, Bodycote was specialising in bulletproof and flame retardant clothing by the 1970s. The flood of cheap textiles from the Asian market in the 1980s accelerated their move away from textiles and into heat treatment services – through organic growth and careful acquisitions within a very fragmented and localised industry.

The 2001 acquisition of the Lindberg Corporation (the biggest heat treatment provider in the US) entrenched Bodycote as having the largest integrated network of thermal processing sites – the scale and efficiency of which has improved further since. We discuss Bodycote’s key specialist technologies and the strategic actions that have set them apart from competitors.

A valuable link in the chain
Thermal processing services have always been an essential part of production across many industries, yet much of our understanding of how the properties of metal can be altered has arisen from developments only over the last 200 years.

Bodycote has endeavoured to remain at the forefront of technological advancements within the heat services field and acts as a key link in the manufacturing chain. Their expertise is applied mid-process to strengthen clients’ product components, with a minimal cost for services rendered compared to the value add, as final product quality is heavily reliant on their specialist applications.

Bodycote primarily services multinationals in the automotive, aerospace and defence, energy and general industrial end-markets. Their thermal processing services are centred around two key technologies:
Classical Heat Treatment (CHT) involves the controlled heating and cooling of metals by industrial furnaces to alter the microstructure of a component, thereby increasing wear resistance and providing protection against corrosion. CHT is a critical part of the production process used in the manufacturing of a multitude of products – from seat belt buckles to turbine blades. The current value of the global CHT market exceeds £20 billion per annum and Bodycote is the largest independent service provider in this market, with three times the market share of its nearest competitor. Less than 20% of the market is processed by sub-contractors such as Bodycote, with the balance handled by manufacturers’ in-house capacity.

Specialist Technologies (ST) comprises a range of six early-phase, highly differentiated processes that exist within a fragmented market (four are unique to Bodycote, two are substitutes for CHT). Of the specialist technologies tabled above, Hot Isostatic Pressing (HIP) and Specialty Stainless Steel Processing (S3P) are the most prominent for Bodycote, as can be seen by recent contributions to revenue and operating profit as charted below.

Specialist technologies are the growth engine
The global ST market is currently valued at £5 billion and forecast to grow by 8% per annum in the coming years due to increasing demand, particularly from the aerospace and automotive end-markets.

There are significant barriers to entry in the aviation industry (quality certification and insurance) for smaller players and Bodycote’s size is therefore advantageous. This is further strengthened through their recent acquisition of US-based Ellison Technologies that offers complementary specialist technologies in thermal and engineered surface spraying. Although hindered by the Covid-19 depression of the travel market, considerable changes in the aerospace market are creating opportunities for Bodycote.

The use of specialty heat treatment technologies in the automotive market has been buoyed by the current rapid transition from traditional Internal Combustible Engines (ICEs) to Hybrid Electric Vehicles (HEVs) and, eventually, Battery Electric Vehicles (BEVs). Bodycote’s current ICE heat treatment exposure is relatively low (10% of group revenues) and encompasses the classical heat treatment of products such as gears and air bag components, whereas high volume, high surface area products like doors and bonnets are handled in-house by OEMs (original equipment manufacturers). HEVs have more complex drivetrains than ICE vehicles, creating more opportunities for specialty heat treatment due to increased needs for thinner, lighter components built with higher tolerances. This presents another attractive opportunity for Bodycote, which should significantly outweigh losses from the inevitable decline of ICE vehicles.

A winning network allows furnaces to stay fuller for longer
Bodycote’s extensive facilities network is one of their strongest strategic advantages – boosting economies of scale and particularly benefitting logistics and equipment utilisation (as illustrated below):
• Bodycote’s facilities are linked by trucking routes, where a single facility focusses on one technology in particular -continuously sourcing smaller batches from the catchment area of its sister facilities in the network (within a 100 km radius). In contrast, most competitors operate from only one facility having to offer a full range of services under one roof, typically causing inefficiency. Bodycote can therefore compete in this very fragmented market, which together with capabilities in specialist technologies, allows them to increasingly win business from OEMs themselves – in higher value-added work segments.
• OEMs perform a large amount of the global heat treatment services in-house, where they have the scale to ensure high-capacity utilisation in their facilities (ie in large surface area, high volume components like car doors or where the heat treatment is an inherent part of the manufacturing process).
• While OEMs are better positioned to manage higher volume runs – achieving better returns and benefitting from automation – Bodycote thrives on more complex runs that require skilled labour. Being able to simultaneously handle more of these complicated runs for a number of OEMs enables higher capacity utilisation (furnaces are full for longer) and, therefore, excellent margins.

Additionally, Bodycote’s high capacity utilisation for certain treatments means that carbon dioxide emissions per treated product are often lower than they would be for the OEMs on an in-house basis.

Past challenges support future solutions
As the only global thermal processing service provider in an extremely fragmented market, Bodycote operates across 23 countries with an extensive network of more than 165 facilities (the closest competitor has three facilities) – each generating approximately £4 million in revenue. The business has high fixed costs [primarily skilled labour (40%), and utility and gasses (20%)] and holds low levels of its own inventory – rather applying value added services to customer’s work in progress material. In past downcycles, this has proven to have had a levered effect when customer volumes drop sharply, as Bodycote experiences a more pronounced cash flow decline than its customers (who can run down their inventories).

Since the financial crisis in 2009, the company has worked hard at controlling costs through carefully engineering large degrees of flexibility in labour and site costs. The management team’s focus on cost restructuring resulted in a reduction of the employee base by a staggering 5 000 members (representing 45% of the total labour force) and the subsequent doubling of productivity measures (ie revenue per employee). They have also sought to increase the number of temporary employees (to 15% of the total labour force).

A winning network of sister facilities also provides a useful opportunity to scale down sites when necessary, in a way that concentrates certain production types at single sites to preserve profitability. This flexibility was evident during the Covid-19 hard lockdowns, where the company materially outperformed its own previous crises track record and smaller competitors – boding well for future market share gains.

Difficult to replicate with growing competitive advantages
The ability to add value to metal makes heat treatment an integral link in manufacturing processes. An ever-strengthening network of sites and increasing leadership in fast growing specialist heat treatment applications, means that this modern blacksmith should continue to forge ahead. As such, our client portfolios have exposure to this unique long-term investment opportunity.

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