Bodycote PLC

LSE:BOY

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Bodycote Trading Update Call. [Operator Instructions] Just to remind you, this conference call is being recorded.I will now hand the floor to Stephen Harris, Group Chief Executive. Please begin your meeting.

[Stephen C. Harris, Group CEO & Executive Director]

Good morning, everybody. Stephen Harris here. And I've got -- Dominique is on the line as well, our CFO. So the trading update, you will have seen that we released it this morning. I'll just pick out a few points, and then we'll go straight to the Q&A, if we might. So firstly, yes, obviously, very unusual times. We've been moving very fast in our approach in this situation. And big thing for us has been to make sure that we actually have -- our workforce is very well protected, and I think we're achieving that very well. The situation is that most of our facilities have kept operating. They've been classified in their various countries as providing essential services. And we've been operating some of it specifically at extremely low levels that one wouldn't normally do that, but in some instances we're doing it because we're actually supplying medical equipment which is particularly required in the situation. But overall, we've taken swift actions to reduce our costs in the face of the downturn.You can see from the trading update the scale of the downturn, which really only started from the end of March. It's difficult for us to give you specific color as to what's going on because things are moving quite rapidly and indeed odd things happening across different customers. I say odd because they aren't all uniform. So where some customers in a particular sector, like aerospace, have started going down quite rapidly, others haven't moved. And I think a lot of this has to do with the various inventories being held in supply chains and in some cases OEMs and the rate at which people are destocking. We can't particularly give you a good number on the destocking that's been happening, but it's clearly been happening. And I think the only thing we could possibly say is that it looks like in the round that it's around the 10% to 15% decline is due to destocking effects, but that is an estimate guess even if it's somewhat an educated guess.In terms of the movements, automotive went down really, really hard because, as I think most of you know, the -- nearly all the OEMs in the world shut their doors for at least 2 weeks. So that went down really hard. And so whilst we're seeing those facilities come back online and supplies there coming back online, the slower-moving side of life, which is the aerospace side, is on a downward trajectory but not at the kind of pace that suggests that it's going to be totally disastrous there. And overall, general industrial is holding up nicely. It's still down but a lot less than anything else, which is what you of course would expect given the nature of that business. And that points to the strengths of the -- of geographic and industrial diversification that we have in Bodycote.In terms of our savings. I mean clearly we've expanded our restructuring program. I will have to say it's lucky maybe. We had actually done a lot of planning ahead of time. We hadn't expected this pandemic, but we were looking at various restructuring options in the company, which we announced at the full year results of what we intended to do, but the fact that we looked at a lot of things enabled us to move very quickly in expanding that program and which is ongoing. Currently we're expecting to save about GBP 45 million in our restructuring program and annualized costs. Obviously, if we see top line going down further for a sustained long-term perspective, we can restructure more. It's not our intention at the moment. Similarly, we have a bunch of temporary cost savings that we've put in place. This is primarily making use of cost containment measures basically getting rid of all discretionary spending and the like but also making use of various programs in mainland Europe and short-time working. And we've also laid off temporarily staff in the United States, although they don't have the benefits of the same kind of programs that the Europeans provide. And so in the United States we've actually been topping up people's health care in order to make sure that our employees are well looked after as best we can.So those kind of issues in total are giving us about GBP 7 million per month in savings. Those saving measures, just like the restructuring measures, are something we can control. So as the top line moves, we will move our cost base accordingly. When revenue comes back, as surely it will in time, the issue will be -- is we'll probably be increasing our cost base initiatives through the addition of temporary workers, which is always our approach in these times, to keep future flexibility. So we won't actually be adding back a lot of fixed costs of full-time labor as we go forward.Just moving on to our financial position and liquidity situation. Happy to say that we did in fact conclude our debt extension. Our headroom is now at GBP 170 million. That's something that we actually signed yesterday, so it's rather late-breaking clause [ on ] new facility. And we've got 5 years running at very good rates, and so we're quite pleased with that.Overall, that's about all I can say, not -- just one point on May: Not a lot of difference that we can see, but it's early days yet. We haven't had the May results in but nothing gigantically different from April in May.And with that, I'll throw it open for questions, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Andre Kukhnin of Crédit Suisse.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

It's Andre from Crédit Suisse. Stephen, I just wanted to pick up on your May comment that it's not looking drastically different. And I appreciate it's very difficult to judge given this constellation of various holidays and et cetera, but is it not surprising you a little bit that there isn't kind of more of a comeback in May given that there were some shutdowns easing already?

[Stephen C. Harris, Group CEO & Executive Director]

Andre, well, not really because I mean what I'm referring to is the totality. I mean clearly you're seeing movements in different segments. So automotive is coming up. So if we were an automotive play, you might say, well, we've seen recovery. On the others -- and aerospace is declining slightly. I mean it didn't decline much, to start with, not -- and not as much as automotive anyway. And so they're moving in different directions. And in general industrial the background is remaining fairly stable, as is energy. So in totality it's not much different, but there are different parts moving at different speeds.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

Got it. And on the destock, thank you for your quantification. I'm sure your guess is essentially more educated than ours. And I just wanted to get your thoughts on, from your knowledge of customer inventory, how long do you think that can last.

[Stephen C. Harris, Group CEO & Executive Director]

Well, very good, Andre. Well, if my first one was a guess, this one [ is clearly a thousand parts guess ]. I can't tell you at all. What I can tell you is anecdotally that there are quite a lot of areas of the supply chains around the world that went into this situation with low inventories. I don't think there's anywhere that it was particularly bulging, but there was a lot of reduced inventories in quite a lot of areas because in fact people were starting to see a bit of a downturn coming into this situation. So I don't think that they were flush with inventories before. So how long it will take, I don't know. I mean that's a whole combination of different factors which have been guessed, but it's certainly not going to be a long, long time because they didn't have lots to sell within a number of industries. That's about the best I can do, Andre.

[Andre Kukhnin, Mechanical Engineering Capital Goods Analyst]

No, I appreciate that, yes. I think that's very insightful. I wanted to just finish with a broader question. Is there anything at this stage? I know it's only been kind of 2 months of this abnormal situation, but is there anything at this stage already that you can say that will be kind of structurally and permanently different for you in terms of how you operate or how you see some of your customers operate post COVID, if we think about kind of 12, 18 months and beyond that?

[Stephen C. Harris, Group CEO & Executive Director]

Nothing I could say for sure. I can tell you that there are a lot of moves afoot. And so one of the things that is quite clear is that in Europe companies, large companies, that have previously not outsourced their heat treatment, because they have labor problems and they will have been facing strikes, are for the first time in a very, very long time entering into social plans laying off permanently quite a lot of people. And the result of that is that it does provide us with opportunity because in this situation they won't have the same pushback from the unions about outsourcing. So we -- they're certainly on that case, but we want to actually get business as we can. I mean in Europe it offers a certain amount of opportunity if we can get in faster. A problem we have in this situation is that the senior managements that have to make these decisions have got quite a lot of other things on their minds, but if we can get in the door, we could get some progress in that respect. Similarly, in other areas like North America we are seeing a situation where people are waking up to the fact that thermal processing facilities for them are fixed costs. And our approach in North America is one of, "Why keep these fixed costs? Give it to us." And so we have some discussions going on that, so an opportunity in this. Will it be permanent? If it's outsourced like that, yes. And from an industry standpoint, the only thing I would say is I think that the move eastwards that we saw in Europe before this started for automotive, I think, will continue, although of course we do have situations like some [ governmental clients have been ] trying to encourage people to do their electric cars in country [ in the past ], never mind the costs. But I'm not sure how successful that will be. Right now, the likelihood is that we'll see the new automotive models going eastward, [ I think ]. I don't mean eastward Asia. I mean eastward Europe. And on that note, I mean, China is in its own [ bubble break ]. I mean it's doing quite nicely. And we don't have any complaints about China in terms of trade at the moment. It's quite good.

[Operator]

Our next question comes from the line of Andrew Wilson at JPMorgan.

[Andrew J. Wilson, Analyst]

I just want to start with a couple of longer-term ones actually, please, Stephen. [ And following an ] interesting comment in terms of the expansion or extension of the restructuring pools, I mean, it doesn't sound like there's anything that you've seen in your markets or your customers over the longer term which is driving that, but rather it's kind of an opportunity to make some of the changes which ultimately are going to be better for the business over the longer term. I guess, thinking really specifically around aerospace, where clearly the outlook, if you look at some of the production volumes at least, have -- looks a little bit different as opposed where we were 6 months ago.

[Stephen C. Harris, Group CEO & Executive Director]

Yes. Andrew, the -- I think that's a fair statement. One of the things that we shouldn't forget in this is our facilities are pretty flexible. So one day, it can be an aerospace facility, and next day, it can be a general industrial facility. Because the processes are the same processes with everybody. It's just the certifications and the working practices. So if, and in fact I'm fairly sure, we will see a prolonged lowering of aerospace sales compared with where we might have thought they were before, that doesn't stop us actually putting work into those same facilities, which are very, very high-quality facilities. I mean that one of the things about the aerospace facilities is that we -- in terms of [ core ] quality or whatever, they're very modern, clean and very well equipped, generally speaking, in the aerospace side because we've been investing so heavily in that over the years. And so moving them into other areas, I mean, strongly like that, one of the big ones for us at the moment is medical, is relatively straightforward. So you don't have to take business out [ in terms of each ] segment necessarily. Where we are on restructuring is where we're in high-cost areas where there is too much competition and not enough customers. I think of it that way. And as the water levels have fallen a bit, we've expanded our program, for example, in Germany. It's bigger than we thought we were going to do originally; and similarly, a little bit more in France and also in North America. I mean in Great Lakes region in North America we have gone into more restructuring because those areas are, anyway, highly competitive but fewer customers and lower sales levels. I mean we don't quite need as much infrastructure as we had before. We're still keeping the capacity because we're putting into the sister plants, but no, it's not a case of we've got to take out aerospace facilities or automotive facilities because that particular business is going to be lower. It's really quite of geography and local [ into land ] customers issue. And whilst we're on that, if I could add one thing: CapEx. So in these situations, we try and keep our maintenance CapEx going. What you don't want to do is skimp on maintenance. So we're at a slightly lower level at the moment mostly because of people have been unavailable to do the maintenance, but now that's ramping up a bit.In terms of expansionary capital, it may surprise people that we are testing ahead with expansionary capital, particularly in construction of new facilities that we have started. Those new facilities are going in place for numbers of reasons, one of which is expansion of the geography. So for example, in Hungary, where we're going after the new automotive [ strains ] of electric vehicles, for example, but also in areas where we're replacing old and end-of-life plants. So [ in plants we're building in the ] Great Lakes area, we're just about to put on a couple of plants. That will be going on towards the end of this year, and those are replacing the facilities that we're taking out. So that will put us in a much more efficient situations. And the new plants should be a hell of a lot more profitable than the older plants that we're replacing. That's a long answer to your question, Andrew, but I hope it's -- gave you some color on it.

[Andrew J. Wilson, Analyst]

No, very much so. And if I can maybe just -- hopefully, just the nearer term, just to check on a couple of the details. I think the initial -- there was initially given some guidance on the income statement charge for the initial restructuring, and I don't know if you could provide us with an update of what you're expecting that to be on the extended program. And I guess, on a similar basis, I think in the statement you've talked about the business was profitable on a headline operating profit basis. Would it also have been profitable on the reported operating profit?

[Stephen C. Harris, Group CEO & Executive Director]

When you ask detailed questions like that, that actually tells me you're really asking Dominique, so I'll ask him to take that one.

[Dominique Robert de Lisle Yates, CFO & Executive Director]

Okay. Well, I think, I mean, if you look at the restructuring charge then with the full year result, we said we were expecting around about GBP 30 million, of which roughly half would be cash. So now we're indicating that the cash cost of the restructuring will be closer to GBP 25 million. I think from that you can impute that the total P&L charge would be GBP 40 million-plus that we'll expect on the restructuring. The second part to the question -- apologies. I've -- it's momentarily slipped my mind -- well, yes, on -- sorry. On the exceptionals in the -- and well, for -- we will have the restructuring charge going through. And that will depend month by month, depending on what exactly has been approved in that [Technical Difficulty].

[Stephen C. Harris, Group CEO & Executive Director]

You're breaking up…

[Dominique Robert de Lisle Yates, CFO & Executive Director]

Okay. So those costs are lumpy because that will depend month-by-month on which projects we are approving in any given month. So I'm not sure that that's particularly helpful in terms of understanding what the underlying profitability is doing.

[Operator]

Our next question comes from the line of Jonathan Hurn at Barclays.

[Jonathan Hurn, Research Analyst]

Just a few questions from me. Firstly, can you talk a little bit more about what you're seeing in aero, please, maybe just in terms of the level of decline that has come through in April and also how you're thinking about the rest of the year? Obviously, from some of your major customers such as Rolls there have been some quite tough news flow for them. So just really how you're thinking about sort of the shape of aerospace. That would be helpful. That was the first one.

[Stephen C. Harris, Group CEO & Executive Director]

Yes, certainly. So we're basing our estimates in aerospace on probably what everybody else is basing them on, which is the announced programs from Boeing and Airbus in terms of the build rates on their various models, which in shorthand means about a 50% cut in wide bodies. That translates obviously to mostly -- most of Rolls' situation. And it's depending on a particular [ plane in 2030 ] in the narrow bodies, which is a GE, Pratt & Whitney [ proxy ]. And so that's where we're looking for, in terms of a long run rate on these things. In terms of a short run rate, it's quite difficult to say because you've got a whole mishmash of things that are happening in the aerospace situation. It's made a little bit more difficult by the fact there's a very large proportion of supply chains, particularly in the United States, that are private equity owned. And in these situations, you find the private equity guys under more extreme strain than others perhaps, and so their behavior tends to be somewhat counterintuitive sometimes. But so lots of movements down and in some cases up, which is a bit strange. The -- I don't think it's kind of weekly trend [ dating ] is very useful in this situation. The only thing I can tell you is that, the places that are nearer the final assembly of the plane, they're the ones that have come down the fastest, whereas as we actually saw what happened, the raw material end in the initial casting side has been the slowest to move. And the reason for that is that, when we were in the sort of strong upbeat in terms of this aerospace cycle, you had a shortage of capacity in castings and forgings. And in fact, it was down, and in some ways this comes as a blessing in disguise for some of these guys [ that don't start to get penalty ]. And now their requirements for output has fallen. So there they've kept going the longest, if you like, in some -- on the raw material [ and the life from ] the initial castings and forgings, whereas the final components for assembly have gone down the most. And that's about all I can tell you. I mean, actual numbers, it depends on which territory and which customer. And it doesn't give you any good picture for it.

[Jonathan Hurn, Research Analyst]

Okay. That's helpful. The second one was just coming on to Specialist Technologies. So obviously no mention in the statement. I mean historically there's been a sort of a relative outperformance between traditional and specialist. I mean, are you still seeing that? Or is it fair to assume that that's down by the same rate as more traditional heat treatment?

[Stephen C. Harris, Group CEO & Executive Director]

No. I think that we would expect Specialist Technologies to outperform the Classical Heat Treatment side. I think that, in the near term -- and we are seeing that. In the near term, there is a little bit of a strange issue in the fact that some of the specialist technology is in automotive. So we've got some low-pressure carburizing, one of our technologies which [ should be more like ] transmission. And as the OEMs completely shut down, and we're supplying directly to OEMs, that business went away completely for a period. Everything went away [indiscernible] supply. That's now coming back. And in fact, we've been told by one of the large North American OEMs [ which we had ] production and particularly transmissions that we're talking about, which [ tender in that ] [indiscernible] SUVs and light trucks, it's actually going to be quite strong. So I think -- and I hate doing this, but in the current situation it's the only thing I can do: My guess is that, that will come back quite strongly, and overall Specialist Technologies will do pretty good. It won't be up, but it won't be down as much as Classical Heat Treatment.

[Jonathan Hurn, Research Analyst]

Okay. And then, I mean, just last one for me, just in terms of sort of the competitive landscape. Obviously, if we look out there, some of your sort of competitors are quite small and obviously don't have a huge amount of scale. Have you seen competitors go out of business during the downturn? Do you think the competitive position for you right now is maybe getting marginally better?

[Stephen C. Harris, Group CEO & Executive Director]

So competitors. It's an interesting question in the fact that the small companies that do the same kind of activity don't tend to compete with us head-to-head. They don't -- we're not in at the same level and a lot of customers. They do compete with the [ printers ], for sure, but they're not that much of direct competitors in any [indiscernible]. [ There are ] some of them. The smaller ones definitely are the ones that are the most stressed. We are seeing people close their doors completely, going bankrupt, but one of the things you've got to remember about these businesses is the assets are very long lived. And as one of my colleagues, years ago, said to me, these things are like golf courses. They always stay. It's just the ownership changes. And that's what -- and we don't expect them to disappear completely forever. Somebody will come in and pick up the assets out of bankruptcy and start again, but they're not really a big impact on us. It does give us the opportunity for -- if one of the larger ones is under too much stress, for us to make an acquisition. And we are in fact talking to people, although it's quite difficult in the current environment because there's a lot of commotion around. So we have to be very careful how we do it, but we are talking to people, asking them if finally they've decided that it's time to retire. But I don't think we'll be going for the really weak businesses because they're going bust, exactly which is why we wouldn't buy them.

[Operator]

And our next question comes from the line of Harry Philips at Peel Hunt.

[Harry Philips, Analyst]

Just a few from me, please. Stephen, when I got on the call, just you were talking about 15% destock. And I'm just wondering if you could just run through that comment again, please. And then in terms…

[Stephen C. Harris, Group CEO & Executive Director]

I'll send you the transcript, Harry. Don't worry.

[Harry Philips, Analyst]

[indiscernible]. In terms of drop-through, with the sort of mix of that, sort of the GBP 7 million a month, how does that change your drop-through profile? And I've got in mind what the drop-through ought to be, but I'd be interested to hear your thoughts.

[Stephen C. Harris, Group CEO & Executive Director]

[ I think so, I'd say ]. I'll tell you about destocking. The first thing I said was it's an outright guess, okay? So please put that into perspective. I would expect it, the destocking, to be about 10% to 15% in our numbers, but I can't prove that, okay? That's the first [ one ]. On the drop-through, once again, I mean, things are moving really, really fast. The rate at which the cost savings are coming in, in some territories it's more delayed than others. Not everything is moving at the same speed. So to come up and tell you what an actual number the drop-through is -- for us at the moment, it's quite difficult, but I would be disappointed if it wasn't in the low 40s.

[Harry Philips, Analyst]

Okay. And then the next 2 questions. One is just in terms of your emerging market sort of businesses. How are they holding up? And then finally, in terms of HIP-ing, clearly quite a big aerospace content there, how easy is to switch HIP-ing to other industries? If I remember right, the aerospace is about 65% of sales there.

[Stephen C. Harris, Group CEO & Executive Director]

Okay. So emerging markets situation is obviously helped by China which is doing quite nicely. Eastern Europe, it's quite interesting because, I mean, I'm actually calling you today -- I'm in Prague. And everything is open. The sun is shining. You wouldn't thought anything is happening in the world. And a lot of production has remained open in Eastern Europe. It's really a question of their customer base. And so we've seen negative impact in Eastern Europe as well, but I think Eastern Europe is recovering at a faster rate than the other places [ around the piece ]. So overall I would imagine emerging markets are going to do fairly well, but there is a lot of guessing, [ clearly, on my part here ]. I don't know for sure, but life seems much more normal this way.As far as HIP-ing is concerned, you're absolutely right, Harry. The HIP-ing comes in 3 flavors these days. One is the making casting stronger, [ getting rid of the frosting in ] castings. And that's really the aerospace piece, which is densifying casting. Undoubtedly, that is going to be lower, for sure. Then you've got 2 other areas; one which doesn't really count at the moment, which is the additive manufacturing part of it. It doesn't really count because the volumes are tight even though it keeps going up at a rapid rate. It's like nothing has happened. And the third part is the larger port -- part, which is our -- what we call our Powdermet business, which sometimes makes use of 3D printing [ when it comes to ] manufacturing but is in itself an additive manufacturing technique. That has been primarily focused on subsea work. And indeed, the subsea work is still continuing. That's a little bit of a shining light there, although we don't expect it to go up fast given the economics in that industry, but the subsea big projects are still moving ahead. But what we are seeing is the time and the opportunity to diversify into other areas, and we have an ongoing program on that. It will take time. It's been taking an amount of time already, but in due course, we will see HIP-ing capacity being utilized for more product fabrication and which in time will make up the aerospace. It's actually probably just about the same time as aerospace starts going back up, and [ then there'll be more of it ].

[Operator]

Our next question comes from the line of Andrew Douglas of Jefferies.

[Andrew Douglas, Equity Analyst]

Just 3 quick questions from me, please, if I can. Can you just talk through the restructuring maybe in little bit more detail? It's probably one for Dominique just with regards to the phasing of the benefits that come through. Clearly, you just started now and it will be ramping up through the second quarter. So if you can just give us a little bit of guidance as to what we should expect kind of this year and next year and maybe '22. Second thing is again I think for Dominique as well. Cash is clearly a very good number in the statement. GBP 38 million of free cash flow is good. Can you just talk us through how kind of clean that number is with regards to -- of those [ warranty ] deferrals? Or you haven't kind of spent any money on restructuring costs yet. So just help us understand a bit more about that cash number. And then third, just quickly on Ellison. I appreciate that it's a reasonably tough market and you've just got kind of your hands on the keys, but any initial comments kind of what you've found now, easier, tougher to put through kind of restructuring that you might need to, et cetera? So any help on Ellison would be good.

[Dominique Robert de Lisle Yates, CFO & Executive Director]

I'll do Ellison first…

[Stephen C. Harris, Group CEO & Executive Director]

Okay. [indiscernible] Dominique is [indiscernible]

[Dominique Robert de Lisle Yates, CFO & Executive Director]

Okay. So the phasing of the restructuring benefits. We've said in the release that we're anticipating GBP 45 million of annual benefits by Q2 next year. Clearly, that will build through this year. 2 plants had already shut by -- or in April. So within the April result there really isn't a significant benefit at all from restructuring, but that will build over the months to come and back end of this year as those plants shut. We don't have the exact timing on all of those facilities. In some cases, there's some consultation, et cetera, that needs to take place, but it will have built fully to the close to GBP 4 million a month benefit by Q2 next year. The second question was around cash and how clean it is. Well, there's nothing funny in there. At the same time, I think one -- in some ways, one would have expected our free cash in the first 4 months to -- given the situation, to have been quite good because, up until end of April, we've largely been collecting receivables that would invoice pre the fourth week of March. So at sort of normal levels of receivables. And in the meantime, we took a lot of costs out. So that does benefit. There is also an element, to your point, of deferral. So security costs, that type of deferral, taking advantage of government schemes around the world where people have been given extra time to pay those. Quantification, that's a few million, probably GBP 3 million or so. There's an -- there's also an element where we are making lower tax payments based on a projected lower level of profitability for the year. So that's a real benefit. That's not going to come back [ later ], but other than that, there is nothing funny or unusual in the free cash numbers.

[Stephen C. Harris, Group CEO & Executive Director]

Ellison, [ what we're hearing in ] Ellison. The situation in Ellison, we're not restructuring Ellison. So what we've done in Ellison is we've got some temporary layoffs in Ellison. The business level for Ellison has tracked pretty much GE. That is their major customer, anyway. And so it's as expected, in this particular situation, where we expect it to be. So we made temporary layoffs, but as the business starts to reposition itself, we'll bring those people back to Ellison.

[Andrew Douglas, Equity Analyst]

But you haven't found anything kind of interesting or alarming since you've gotten [indiscernible].

[Stephen C. Harris, Group CEO & Executive Director]

Interesting, yes. They've got a lot more IP than we thought they had. And alarming, no, no. It's a very good business, frankly.

[Operator]

[Operator Instructions] We have one further question come through. That's from the line of Celine Fornaro of UBS.

[Celine Fornaro, Head of EMEA Industrials Research]

I would just have a follow-up comment regarding how you see the, let's say, offsetting of the structure, maybe slowdown in aerospace, from Powdermet businesses and other activities. But shorter term, you have a lot of growth plans for your aerospace business. So you seem, I would say, more relaxed than some voices out there on the structural challenges faced by aerospace over the next 2 to 3 years. Is it because you think there is a lot of this outsourcing opportunity, particularly in the end market? Is that where you see some potentially less [ marginal ] decline for you?

[Stephen C. Harris, Group CEO & Executive Director]

Yes. That is exactly -- I wouldn't say that I'm ecstatic and over the moon about it, but it -- certainly it means that we've got a number of opportunities there actually. One of the things is that there's a lot more work insourced in aerospace than most industries. The customers in that particular arena have chosen to keep a lot of the thermal processing technology in house; not HIP-ing actually, but it's the heat treatment side [ of life ]; and even the thermal spray, which is the business that we bought with Ellison. And so there's been a lot of in-house work done there. And in the current scenario, as you probably know, there are a number of these players that are somewhat stressed on the cash front indeed and certainly on the cost front. And so it's in North America we've actually got some nice opportunities, and we're hoping to do the same thing and at scale in Europe as well. So that's an offset for us if we can pull it off, but as with all this year, you don't go talk about the order you've won until you've won it. So -- but it does make me feel somewhat more relaxed than I might otherwise be. There's some good observation.

[Operator]

And we've had one further question come through. That's from the line of Michael Tyndall at HSBC.

[Michael J. Tyndall, UK MidCap Equity Analyst]

It's relating to pricing. Just trying to think, as we come out of this recession or this dip, how you resist pressure on the rate card thinking about, for example, Rolls-Royce asking suppliers to take a cut? What's the trick? How do you make sure that you continue to operate at the same rate as you were prior to the crisis?

[Stephen C. Harris, Group CEO & Executive Director]

Yes. I'd like to quote my favorite vice -- sorry, first lady [indiscernible] just say no. So that's the way to do it. But I mean to be honest, it is we always get price pressure. I mean always. It's an ongoing fact of life. And you -- there are various ways you'd have to deal with it, but the idea that these larger companies that are actually getting more government support than anybody are pushing down on their supply chains to give them price reductions is a little bit strange, frankly. Because in some of these supply chains there are very, very small companies. [ And like where we're ] concerned, Our biggest issue is that -- our inputs. I mean, [ one, there are ] people in energy primarily who don't get any reductions there. So we can't pass on any pressures. So you're [ calling it the rise ]. So you have to resist it [indiscernible] you have to resist it. "Look, we just can't do it." We have nowhere for us to go. So yes, I know there's people, a lot of people out there [ squeezing ] a lot. It happened even though a financial crisis was on, but we just have to keep going.

[Michael J. Tyndall, UK MidCap Equity Analyst]

Got it. Is there any risk that your competitors, I realize that some of those are small, are a bit more flexible on pricing? Or is it -- I mean, as you said, the inputs are pretty fixed, so is it…

[Stephen C. Harris, Group CEO & Executive Director]

Well, most of the pressure is coming in, in aerospace, frankly. And the competitor set that we've got in aerospace is very, very small. I mean the major competition is the OEMs themselves. And there aren't many people playing in the aerospace market other than us [ that move into those ]. We have to carry 750 million of insurance. I mean there's not many small players who can afford it. And so if there are some out there that want to give up price increases, it's not going to help their customers because they're very small, in the first place. I mean it's not going to help them because they're probably distressed. So not really an issue.

[Operator]

[Operator Instructions] As there are no further questions at this time, I'll hand back to our speakers for their closing comments.

[Stephen C. Harris, Group CEO & Executive Director]

Well, thanks very much, everybody. Sun is shining where we are. And I hope it is where you are and you get -- you [ actually can go out and ] enjoy it. Take care. And hopefully, we'll see you in person soon. Bye.

[Dominique Robert de Lisle Yates, CFO & Executive Director]

Thank you. Bye.

[Operator]

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.