Bodycote plc (BOY) Earnings Call Transcript & Summary

Hello, and welcome to the Bodycote trading update call. [Operator Instructions] Just to remind you, this conference call is being recorded. I'll now hand the floor to Stephen Harris, Group Chief Executive. Please begin your meeting.

Good morning, ladies and gentlemen. Dominique Yates and I will go through this, this morning. I'll just give you a light trip through the trading update in terms of looking at some of the sectors there and then we'll open up for questions and answers. So if we just talk about each of the sectors in turn, I think the first one is automotive. And the question on most people's minds is probably, so what's the semiconductor shortage doing to the automotive world? And how is it going? How is it recovering? And I think our general answer to that is that the automotive business has recovered very strongly. The actual impact of the chip shortage, we don't really know. I mean in fact, if we haven't read about it in the newspapers, we probably wouldn't really know what the impact was. The only place we see it is in some very specific areas where we have direct contact, for example, with people like General Motors and they've informed us that they've got 3 of a few dozen plants that are on shorter working hours. But in terms of our sales, it's probably taken a little bit of a crack off the top there, but we don't really know how much, even so our automotive business is doing quite strongly. Moving into the general industrial area. So the general industrial area is recovering. I would remind you that general industrial is the slowest to turn in our business. So we don't tend to see sharp changes in general industrial. People often talk about stocking and restocking, but it happens across a very wide front in lots of different industries. And so impacting the total number, it happens quite slowly. It might be going a little bit slower than some people might have expected. And if you were to ask me to guess, well, what's causing that? I would say it's more about raw material shortages and supply chain disruptions as companies are trying to gear up. I don't see it's a big issue. And generally speaking, this part of the business will keep accelerating, I believe, but at a modest pace of acceleration because it does take a long time for general industrial to move. The more complex one to talk about is aerospace and defense. Defense is doing fine. The civil aerospace side is a story about 3 different pieces. Encouraging, I think, is the general word I would use for this. So the -- if we look at the wide-body business where our primary exposure is through Rolls-Royce, we actually have forecast coming in now for a pickup in that area driven by freight business as much as anything else and a little bit of a following wind from the reinvigoration of the trend overhaul program that we benefit from. But that is -- it's a small amount going up, but it's better than the total flat that we've seen in the past. We're also seeing incoming from the Airbus supply chain. And when I say incoming, these aren't reflected, as yet, very strongly in our numbers. This is more about customers telling us, particularly the likes of Safran and GE about the pickup that they expect going forward. Fundamentally, the supply chain supplying the Airbus A320, the inventory levels that were in excess have been burned off. There is no excess inventory there now, we're told. And so that will be turning into higher growth in due course. We need to remember though that, that particular platform is split 50-50 between Pratt & Whitney and the LEAP-1A. And we don't have a big exposure to Pratt & Whitney. So our exposure is to the CFM alliance's LEAP-1A. And that particular engine and the landing gear associated with these planes will start to accelerate. But the big acceleration will come starting in next year, and that's likely to be once the 737 inventories have been burned down and that will start, probably, we think in the same way we've been saying well along here, second half of '22 is when it will really start growing. And we should see aggressive growth in '23 in that area. So overall, I think the automotive business is certainly going in the right direction. Early days yet. Nothing to get too overly excited by, but certainly, some warm music in the background, if I could put it that way. Energy. I think the point to make on energy is that we have several pieces on energy. We've got a little bit of nuclear and offshore subsea and then onshore. And generally speaking, our business doesn't directly follow oil prices. So I think it's a point to note. And the oil prices have recovered. What drives our onshore business is rig count or more properly, it's actually well count. And what you have right now is in the areas that we serve, which is primarily the Permian Basin. You have a lot of already drilled but not yet in service, not yet completed wells. And so turning them on will take quite a while yet. We don't expect to see a big pickup there because a lot of our business in that area has to do with drilling and exploration as opposed to production. There is some production business that we're related to, but not a huge amount. So energy is a small part of the group anyway at the moment, and that's the picture there. Let's see if the rig counts get up more, we might start seeing some business coming in. Just a word on how we internally are looking at the business. I think it's important to note that the volatility that we saw in 2020 was extreme. So when we compare to 2020, this month, it's going to look quite different from the next month and the month after because the movements that were happening at this time last year were huge. So internally, we actually tend to look at 2019 as a much better proxy as to how the business is doing. And that's why in the trading statement, you've seen our comparisons to 2019. And you can see there that automotive revenues are down 6%; general industrial, down 8%; aerospace and defense, a 35% down on an organic basis there. Overall, 19% down on an organic basis. That, as I say, again, is to 2019, which is a much more steady benchmark for us to look at. Margins are improving as we expected, doing quite nicely, and that's something that should firm through the year. I think with that, we can hand over to Q&A.

[Operator Instructions] Our first question comes from the line of Michael Tyndall at HSBC.

Just a few questions from me, if I may. If I could start with auto. I wonder if you could talk a little bit about the strength just in terms of what's underlying there and the continuity of those trends. Is it just production overall? Or is there something else going on underneath? And then the second question, if I remember rightly, at the full year, there was a discussion around China and potentially looking at maybe brownfield sites to try and get some capacity there. I wonder if there's any developments on that front you might be willing to share? And then the last question is just around head count versus activity. And I guess, as we now move into full-blown recovery, when will you start to think about putting more people on? Or are we still some way off from that point of view?

Okay. Mike, thanks for those questions. Let's take them in turn. Automotive trends, I mean, that's all associated with, at this point in time, with a general increase in production. There's a huge growth going on in the emerging markets for us in this area. And to be clear, China is doing very well and a lot of that is automotive. And our exposure in these areas, just to sort of reinforce to people, it's not really internal combustion. This is platform-agnostic work. So this is a lot of breaks, work going on in steering gear. And in fact, we're putting in expanded capacity to service that work. And as I say, emerging markets, Eastern Europe, acceleration. We've got China growing very strongly. And of course, the U.S. as well has been picking up. The one that's probably been going the slowest is European auto, but it's not shabby. I mean everything is moving ahead there. So no other underlying trends that you could pick out at this early point. As far as the China brownfield strategy is concerned, I don't think we've got anything further to add. We are progressing it. It is never easy in these things, particularly in territories like China to get through all the different levels of bureaucracy. But it is something we're still pursuing, but with no success just yet. As far as head count is concerned, we are adding people already. It depends where. Clearly, China is somewhere we're adding, as I've already mentioned, that's very strong. Eastern Europe, we started to add people. The United States, we're adding people. And I think it's worth just pausing a second there because there are labor shortages out there, most notably in the U.S., and I think this is something that's been quite widely reported, and people then talk about potential wage inflation. So where we're seeing labor shortages, as I would say, on the front line, it's the shop floor. And a lot of this appears to be a fairly temporary phenomenon with people, at the moment, staying out of the workforce. But my American colleagues assure me that as the federal benefit start winding down this September, then we should see the labor force starting to ease up. So there's a slight pinch. I don't expect huge wage inflation coming from that though because it appears to be, at this point in time, at least a short-term phenomenon.

So just one final point to add there on the head count is it seems perhaps, you're right, we're adding in certain areas where our revenues are strong. At the same time, we did have, obviously, in those plants that we were shutting back end of last year, the -- that head count gradually coming off the payroll at the end of -- as those people came to the end of their notice period. So actually, at the end of April, our head count level is very similar to what it was at the end of last year.

And our next question comes from the line of Andre Kukhnin of Credit Suisse.

I have a couple on automotive or AGI. In auto, do you feel you're taking share? I know it's quite difficult to judge by short periods of time, but maybe if you look at the last sort of 6 to 9 months rolling? Or would you say your market share has been unchanged?

Yes. Andre, I think it's important to clarify that when we look at who our competitor is, it's our customer. It's not necessarily other people. And we don't do share analysis versus the other players that are in the, let's call it, the subcontract market. Typically, we don't compete head-to-head with those guys. We have a different value proposition. So I don't see much movement on either front. I mean the issue here is that everything is in recovery. It's not about us getting more in-house work. It's not about us picking up work from other competitors that are in the third-party market. It's just about basic growth. But what I will say is that there are a number of the, Tier 1s mostly, who are looking down the pipe here, who have started quite aggressively looking at expansion, which is something that was slow prior to the pandemic. They're now looking at site expansion particularly in the newer territories. And each is in line with the trend that we've been commenting on. And so we are getting involved with a few-more-than-normal request for, can we put capacity down in different territories, which is quite pleasing.

Indeed. And on AGI margins, very helpful that you indicated it's above 2019 levels already, and that's with volumes. Obviously still clearly off those levels. Do you think you can get back to the 19%-plus profitability with that volume recovery back to '19 levels? Or would it take a bit more than that?

Well, I think you -- there, you're referring to the overall group margins. And obviously, there's 2 parts to that equation. And that will depend on the ADE contribution to the overall margin. But I mean, as we have discussed at the back end of last year, the logic of the restructuring savings that we are achieving out of the business means that as we get back towards 2019 revenues overall in our business, then we absolutely should be seeing higher margins across our business than we were back in 2019.

Got it. But I think -- well, I was thinking more specifically about AGI, but I think you've answered it, Dominique. I guess maybe just a follow-up on this in terms of the thinking about operational gearing that you've outlined before on volume growth from here, should we continue to think about that around 50% as the drop-through?

Yes. I mean we're certainly achieving in line with that, and we're comfortable with that level, yes.

Great. If I may, just a final one on M&A, a usual kind of question. If there's any update if you're seeing the pipeline starting to move in the right direction? Or is it still a relatively slow burn?

Still a relatively slow burn, I'm afraid, Andre. Yes, it's just the way it is.

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

Just 2 questions for me on aerospace. The first question is, I think, historically, within aero, you've said that you're going to lag a recovery. Is that in the guidance that you made in your initial comments of when markets are going to turn? Or is there sort of an additional lag that's going to be there for you? That was the first question.

Let's just take that, first of all. So Jonathan, I'm not quite sure what you mean by lagging a recovery. Our -- it's not the way I think about it. Maybe that's the way it translates. The -- what we should see is our profitability recover faster than our sales just because of the higher margins that we'll be getting. So we'll see profitability getting then up to '19 levels before revenues do. And in terms of our revenues, those should go along with the engine and primary landing gear sales that are going on. And to the extent that, that will lag plane build or plane sales, that's a factor of the inventories of the airplane manufacturers. So I'm not sure if I'm answering your question here, but I don't think anything has changed in airlines in that situation. We would just expect it to be, as the engine sales pick up, we will pick up with them. You may be referring to the fact that, particularly in the United States, as we supply right the way through the engine build from the raw castings to the finished products that would have -- right at the very end, that our -- the initial production on engine, which is the aero structures, which is mostly on the West Coast, will come later as new engines are built -- are required. Yes, that will lag because it's -- it will be the last thing to turn. And certainly, once we see the West Coast structural business picking up, we know that the whole pipeline, in fact, is firing on all cylinders, if you can use that analogy for aero engine, I don't know. But the situation there, it will trickle through the U.S. supply chain from that perspective. And how long that takes in this environment is anybody's guess. Certainly, in the LEAP-1A, we seem to be through all of those problems already.

The second one was just on the excess capacity at aero. Can you just remind me essentially what you're filling that spare capacity with? And essentially, following on from that, as you start to see the rebound coming through in aerospace, can you hang on to those additional revenue streams you've essentially got there?

So the capacity that is mostly still there, by the way. We haven't filled a lot of it, I have to say. It's not as if the aero parts are filling up rapidly with other work. We do have some high spots where we've got medical work coming in, but it's not a huge amount. So will we keep what work we get? I think very definitely because the issue you get with a lot of this work is that it takes time to qualify. It takes time to be accepted through the preproduction approval processes that go on and customers don't like changing very quickly. So the amount of work we've picked up so far has been minimal. We're going to keep going at that. But as we get through this acceptance phase is that should pick up more and more and we will keep it. But as we sit here right now, our aero capacity is still largely unutilized.

Great. And then just maybe one just quick follow-up. Just coming back to that general industrial. Like you say, I mean, if you look at the sort of the growth in the first 4 months, it has been like global IP quite significantly. And obviously, as you go into the remainder of the year, global IP is still pretty strong. So in terms of that improvement, are we going to see a sort of a sequential improvement Q2, Q1, Q3, Q2 as we go through the rest of the year for that general industrial? And if so, I mean, what kind of magnitude improvement do you feel that you can get there?

Well, those questions are well above my pay grade, I'm afraid, in terms of the exactness on -- I can see that we will be seeing improvements. The only way we can look at it really is what we've seen in the past, and this is not a typical situation. The improvements will start coming through. We can't say exactly when, but they should be not aggressive improvements or spiky. It should be a smooth term moving upwards. I can't really add more than that. Maybe Dominique's got a view on something that I've missed here.

No, I don't think so. I think as you say and as you said already on the call, that the GI business doesn't move in a speedy way, one way or the other. So I think a gentle sequential recovery, assuming that everyone's expectations around the uplift in industrial production turned out to be correct.

And our next question comes from the line of Andrew Douglas at Jefferies.

Most of my questions have been answered if you'd like to hear. I just have one on your ongoing restructuring program. Am I right in saying that a vast majority, if not all, of the heavy lifting has now been done with possible exception of 1 or 2 plants kind of now being kind of finally closed. So therefore, there's not a huge amount of work to do in order to deliver your restructuring cost savings. Is that a fair comment?

It's not 100% true. I think it's much better to say all of the heavy lifting has been done, not the vast majority. The -- what we're into now is really the climb down of the clock as people's service contracts come to an end. There's no more planning or jumping around or negotiating going on. It's all in place. It's really a rundown of the clock.

Perfect. And then one just quick follow-up on your previous comment on M&A or lack of. Is that due to lack of interesting opportunities? Or is it largely that price is just really aggressive? Just wondering how that market is actually...

Yes. Yes, it's a great topic, which we could spend hours on if we have it, but we don't. I would say most of the activity that we see is coming from smaller companies that are -- I'm not talking heat treat here, I'm talking specialist technologies actually, smaller companies and adjacencies that have basically found it extremely difficult in this -- in the financial squeeze that's going on. And these are businesses that have been relatively small start-ups and we've certainly got them knocking on the door left, right and crazy. The problem is when we get into them is their viability is problematic and not easy to deal with. And as yet, we haven't seen something saying, oh, yes, that's a great idea. Let's take that one on. But there are discussions on some of that. There are bigger opportunities that are private equity owned, and the problem we've got there still is the private equity guys. If anything, the -- if I can call it the market run, has encouraged them to not take prices higher. So we've had some really wacky conversations with people saying, "That's why the capital markets waive." That's not based in economic logic. But -- so it's really quite a difficult area at the moment in terms of standard M&A. There's nothing that we feel we're on the cusp of competing. It's just a lot of discussions right now.

Perfect. And whilst I'm on. Can I just ask about ESG. We know that you guys have got a good ESG story. Are your customers pushing more and more for that now? Or is it just taking a while to push through?

I wouldn't say we get pushed from customers actually. That's not where it happens. If anything else, it's the other way around. So we're going through a whole exercise right now about how we go to market in terms of ESG with our customers because we do have a very good offering in that respect. It's very rare for us to have a customer sort of smacking us on the head and say, "Come on, you've got to help with the ESG situation." One or two, but very, very few. It's more about us pushing the boat rather than customers trying to pull it.

Our next question comes from the line of Robert Davies at Morgan Stanley.

My first one was just coming back to some of the comments you made around the comparison between 2021 versus '20 versus '19. Just be interested across -- you sort of brought out some color across the sort of end market sort of comparison there. Just be interested sort of regionally where things sit. I know you're obviously not in a huge exposure to emerging markets, but maybe you could just kind of touch on the key regions and sort of contextualize where they are versus where we were in 2019. Is it sort of materially higher in sort of China and much lower in Europe and U.S.? Or would you just be kind of interested, any color you have there, please?

So certainly, it's materially higher in China. But if you want to take sort of a more granular look at that, I'll let Dominique have a go with that. I don't think there are huge movements elsewhere, but Dominique, can you please illuminate us a bit on that?

Yes. I think we're looking organically than it seems as emerging markets certainly contributing to the overall numbers. And that means that the underlying North American and Western European comparisons would inevitably be below the average. But I don't think there's anything very significant in terms of difference between North America and Western Europe that is worth bringing up.

I think there's one other area, which we've been a little bit quiet on, but might as well talk about it now is that there are a few of our emerging -- sorry our specialist technologies that are really clicking on very, very well. So for example, our specialty stainless steel business, S3P, and our Corr-I-Dur business, so both really -- they're really going very strongly compared with 2019. So -- and we should see more of that. So that's something that we've not touched on before, but it's going to be, I believe, increasingly something that we'll be talking about given the success that they're seeing.

And then just looking on the sort of monthly cadence of growth, I don't know this is sort of probably going into levels of micro detail that can lead you down the rabbit hole. But just to get some sense of the volatility or difference, I guess, as you've kind of progressed through January, February, March, April and in comparison to last year, are we talking sort of extreme swings of sort of minus 30 in the group up to minus 5? Or can you just give us some context of looking at those year-on-year numbers versus 2020? How different is sort of 4 months of this year were compared to last year?

Yes. Dominique will take that. I think the big volatility, by the way, was last year as opposed to this year, but Dominique can take it through.

Absolutely. The volatility was last year. I mean you've got to remember that if we go back to last year, in Q2 last year, we reflected, I think it was around about 33% revenue drop through the second quarter. So inevitably, when we're looking then at the 4 months result, that 4 months result against the first 4 months of last year is a significant improvement over where it was in the first 3 months. In the first 3 months, we were down further against last year. And as Stephen already highlighted, that position will change again at the end of May because we'll have another comparator month last year at a significantly lower revenue and again in June and so on as we go through this year. So the volatility is not in this year's numbers. The volatility is in the comparator numbers.

And then 2 questions left I had. One was just around the sort of chip shortage issues and automotive. What is your sort of base case assumption based on what people like GM have told you? Is it that you're going to sort of expect moderating growth over the quarter? Is it just that you're taking a haircut to sort of growth momentum over the year? What are you sort of thinking for shape of growth for automotive specifically to the back half of '21?

So we're not taking a highly analytical approach to it, to be honest with you, because we can't see it in our numbers at the moment. We just imagine that our growth would be higher. The only thing that General Motors has told us is the specific parts, sort of they have on shorter working time or sometimes have taken down for a week. And that is -- it's a small percentage of their overall production. It's not at the level that we can figure into some big analysis. It's just not that way. So I'm afraid we can't give you a lot of color on that at all. It's going along at the moment quite nicely. We don't see it going backwards. We expect, at some point, this whole thing will get itself worked out and provide the end market demand stays, which I don't see why it won't, it will probably start accelerating again. Will that be the end of this year, as some of the people are saying out there? Or would it be next year? I don't know. But it's probably in our numbers already, the fact that the growth is not as high as it could have been. And when that moves out of the way, it will increase. By how much? Really can't tell you, I'm afraid.

And then my final one was just around the savings. Just be curious, in those numbers that you set out for savings, those GBP 20 million this year, GBP 10 million next year, is there anything in that, that was temporary in nature would be affected by some of these wage inflations and maybe just sort of align with that? How often do you sort of renegotiate sort of wage contracts or pricing on the flip side? I guess, I'm trying to get a sense of the push-pull and how much control you've got over that at the moment.

So I'll talk about the timeliness of the pricing and wages, and Dominique can address the rest of that. In terms of the shop floor, which is the biggest part, obviously, that is an annual process. And typically, they run -- it depends on the country, but it will be annual rewards either from April or sometimes as far back as September. So they kick in through the year. We're pretty much set at the moment as to what those are going to be. And we don't see, at this point in time, a problem with inflation in our wages. If we've got a problem, it's in the ability to hire new people. So it's not as if we are pushing our costs up yet. The problem is attracting new people. That may eventually turn around into higher wages, but that's not the issue. We just can't find people at the moment. It's not about offering people more money. As far as pricing is concerned, there certainly is, on our customers, a lot of pricing pressure that is happening. Not from us at this point, but from our -- the other people in the market that are supply our customers with products. They are certainly trying very hard to push prices through. And indeed, some of our larger customers have made it quite public that they, in turn, are taking this opportunity to really increase their prices really quite strongly. We tend to do this stuff under the radar screen, and we do price increases as we can, as we see it. But because of the stickiness of our business, we try not to abuse our position. So we do it quietly. We don't go sticking out, sort of noticed everybody saying, terribly sorry, our prices just went up 10%. That's not the way we work. So we'll do it customer by customer, and we'll move it in as we can. Definitely, we have an opportunity for price increases that should be hovering above any cost increases that we see, given that we've only got labor and energy really industrial gases as inputs. Dominique, do you want to add anything more to that?

Just to sort of reinforce that really and say that, if you go back and look at our presentations half in, half out and year in, year out over the last 10-plus years, yes, we have a very strong, consistent track record of passing through cost increases, cost inflation in -- through price increases. So there's no reason to think that we wouldn't continue to be able to do that.

And our next question comes from the line of Dominic Convey at Numis.

Just a couple, if I may. Firstly, around first half, second half split, and what your expectations are for the phasing of profits this year. Obviously, there's a load of moving parts with respect to various end market trends, and obviously then the phasing of the cost savings to deal with as well. If you could perhaps just give us a little bit of color there. And secondly, just with respect to your civil aerospace comments. You said that the A320 inventories have been burned through. But I'm just keen really to understand what degree of visibility you have on those 737 inventory positions and future build rates. Has there been any movement in your mind with regard to the working assumption that Boeing will ramp up to 31 a month by early next year?

I'll take the aero question, Dominique can take the half 1, half 2, if that's alright, Dom. The aero side is -- the visibility we get is purely from the OEs. They give us their production forecast and, in some instances, all we're getting is planes, and we have to know how many planes are on the ground that, at the moment, that's still are yet to be shipped. And they talk as much as anything else about engine -- sorry, plane shipments as opposed to plane builds. There's a lot of commentary around from different observers, but we know that there are a lot of planes still -- a significant amount of planes in terms of 737, still fully engined up, sitting on the parking lot, waiting to go. And it's those calculations that go through that tell you when the real production of the planes in terms of new engines coming in and landing gear happens. So it's not that granular for us, frankly, in terms of how much is in the inventory. We're taking it from both the OEs and industry commentators to look at it. We certainly can't see it from our own numbers, put it that way. But the GE projections are more useful to us than the Boeing projections. And they suggest, as I think I said earlier, an acceleration in 2022, but then a really strong acceleration in 2022.

And on the half 1, half 2 split, I mean, we were already benefiting from restructuring savings at the beginning of this year, but there is an element where those have built through the year as some of -- we still have some plant closures -- the actual closure happening this year. So those restructuring savings built through the year and to the extent that we've already talked about an expectation of some level of sequential improvement in general industrial, for example, and all things being equal, one would expect our second half profitability and margins to be higher than our first half profitability and margins.

Our next question comes from the line of Christian Hinderaker of Liberum.

I have 2. Firstly, just a question on margin strength, particularly within ADE. You previously highlighted an ability to utilize excess capacity in ADE to absorb throughput from general industrial. And I just wonder whether any such considerations in the margin comments in this update in that regard. Or if it's just the case of an early improvement that you flagged with respect to aero margins improving ahead of aero volumes? And then my second question, perhaps a bit more simple, but just perhaps I can clarify. From your outlook statement, is it fair to assume that you're perhaps on balance a little bit more optimistic than you were at the last update in March?

Sure. So it's a nice question on the margins. It's a little bit different though from the way you might have perceived it. If I can put it in these terms. The work going into any one of these facilities is broadly -- incremental margins are broadly the same between the GI work that it's going into an aero plant and the aero work that's going into an aero plant. So it doesn't really matter whether it's aero work that's coming in or it's medical work or whatever. The incremental margin that you're seeing is really -- it's a utilization-driven issue as opposed to any 1 segment. It's not as if the incremental margin for aero is wildly different from some other market, believe it or not. So that situation is pretty clear. I think it's a higher level of throughput. And it certainly, it's a somewhat rosier picture on the aero than we had seen that we were potentially expecting, but we did start saying quite early on here that there was risk to the upside. But I think it's quite important to note that this is more of a rosy glow as opposed to some red-hot burning growth this year, okay? I mean we don't -- at this point, we're not getting too excited about it. It's certainly -- there's a sort of rosy background growth here, but it's not charging a thing.

So in terms of the sort of I think the second part of your question was around, are we more optimistic than we were a few months ago? I think the answer to that is, marginally, yes. There's nothing negative in this trading update. But as Stephen's highlighted, we're not getting carried away about the outlook.

And we have one further question in the queue so far. [Operator Instructions] And that question in the queue is a follow-up from Andre Kukhnin of Credit Suisse.

I just wanted to clarify on your comment on pricing. Do you see the opportunity to push price beyond the internal inflation you're seeing? Or are you sticking to balancing that?

Well, I'll answer it and then Dominique can answer it. The answer is yes, we will probably go ahead of internal inflation. Dominique, would you like to say something similar?

Yes. Well, I think what it does is it presents the opportunity where we have margins below what are decent margins to somewhat address that balance. But as Stephen has already indicated, we are not out there to push margins half in, half out for parts of our business that already earned good margins because where that inevitably leads you eventually is to losing the business. So it's not -- we're not looking at this as an opportunity to increase prices massively ahead of cost inflation.

But I'm going to apologize a little bit, Andre. The clear answer to your question is, yes, we will be keeping our prices ahead of our costs. I hope that's clear.

Yes. Yes, and I completely understand that there's a balance obviously of customer relationships and kind of pricing yourself out. I just wanted to double check, and I think that's very clear. The only last follow-up I had is just on cash that we haven't really talked about. Just wanted to check that if there's anything to say on cash on how things have developed year-to-date?

Our cash generation is good. We obviously are up against a comparable period last year where the free cash flow was very strong as we had a significant working capital inflow. We typically have a working capital outflow in the first half because there was no real variable pay. Well, there was no variable payouts this year, then we don't have as larger working capital outflow in the first half as we would typically have had, but we should expect a similar working capital inflow in the second half to what we normally achieve. So overall, I think the outlook for cash is quite positive, yes.

And as there are no further questions in the queue at this time, I'll hand back to our speakers for the closing comments.

Yes. Thanks a lot, everybody, for participating in the call here. It's going to be an interesting period going forward here for the next few months because as we've been saying, last year was pretty choppy. This year, we've got a little bit of a rosy glow about life. I'm looking forward to the half year and see what more detail we can actually share with you then. Thanks very much.

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