Coats Group plc (COA) Earnings Call Transcript & Summary

Hello, and welcome to the Coats 2022 Half Year Results Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Nicholas Kidd, to begin. Nicholas, please go ahead.

Good morning, and welcome to the Coats Group plc Half Year 2022 Results Presentation. My name is Nicholas Kidd, and I am the Interim Head of Investor Relations to Coats. I'm here with Rajiv Sharma, CEO; and Jackie Callaway, CFO, who are going to talk you through the results and outlook of the business. And with that, I'll pass you over to Rajiv.

Good morning, and welcome to the Coats H1 2022 results presentation. Today, I will talk about how we are accelerating profitable sales growth and transforming our business to improve margins. Jackie will present the financials, and I will come back to talk about the outlook. This session will end with Q&A. The backdrop for this period was robust demand, continued supply chain disruptions and high inflation. We generally thrive in this environment and increase the distance between us and our competition. On the left-hand side of the slide are the outcomes related to accelerating profitable sales growth. In H1, we delivered 19% sales growth. The commercial teams acted quickly with pricing actions and were ably supported by the operational teams. Demand for premium products remained strong, driven by buffer buying and restocking in the supply chain. Our playbook of price plus productivity offsetting inflation was well executed. I firmly believe in self-help actions and the outcomes during this period were a reflection of that mindset. Our operating margins were up 180 basis points to 15.6%, now well above 2019 levels, which is also reflective of the earnings per share improvement of 30% versus 2021. The business continues to produce strong free cash flow, resulting in net debt of $195 million and a leverage of 0.8x at the half year. On a pro forma basis, adjusting for the debt funded Texon acquisition, our leverage remains comfortably within our target range of 1x to 2x. I'm also pleased to announce that we remain on track to largely achieve our ambitious 2022 sustainability targets. Revenues from our recycled products were $65 million at the end of the first half. Finally, the Board is mindful of the importance of dividends to our shareholders and declared an interim dividend of $0.007 per share, which is an increase of 15% over last year. On the right-hand side of the slide are examples of how we are transforming the business. On 3rd March, we announced the start of strategic projects. I'm glad to report that we have made significant progress, and I will talk more about it later in the presentation. Our business in Brazil and Argentina has been non-strategic and margin dilutive. We sold it to a local Brazilian company in May of this year. We have also closed our operations in Russia and South Africa. Last month, we announced the acquisition of Texon, a market leader in structural footwear components. This joins our already successful footwear, threads and yarns business, and I will talk more about Texon in a few minutes. Let me now talk about our underlying business, which has had a standout performance in the first half of 2022. I will begin with apparel footwear and then move on to Performance Materials. We have seen worldwide retail sales get back to 2019 levels this year. After a long time, we are seeing brands and retailers increase retail prices and reduce discounts. This is a welcome development for all participants in the supply chain, including Coats. Supply chain disruptions continued with China COVID lockdowns, freight disruptions, some shortages of materials and labor in a few geographies. After 12 months of buffer buying and inventory rebuild, we see a gradual return to more normalized patterns of demand and supply that are in line with historical trends. Coats was well positioned to take advantage of the strong demand seen in H1. Our global scale, investment in technology and great teams allowed us to win in the spirit of high demand and unprecedented volatility. During the past 2 years, there is a trend towards more casual, versatile and functional clothing that is more comfortable and sportinspired, now that hybrid working arrangements are the norm and casual clothing and footwear becomes accepted in the workplace. Alongside the move towards premiumization, we are also seeing increased interest in health and fitness, which is fueling demand for outdoor apparel and footwear. These trends are beneficial to Coats. Sales in apparel and footwear increased 21% versus last year, continuing the momentum we have seen over the past 12 months. Our focus on sustainability continues to drive differentiation and competitive advantage as the vast majority of our brands look to deliver on their own sustainability targets. We have seen this in the sale of our recycled products, which ended H1 with $65 million of sales. Our target for this year is between USD125 million and USD150 million of recycled product sales. By putting our customers at the heart of what we do and focusing on quality, agility, sustainability and technical support, we delivered significant price in this division. Our premium products grew faster than the group average, a combination of price, mix, volume and productivity resulted in the operating margin of this division accelerating to 18.2%. The second half of the year will see demand moderating to more normal levels of growth. We are well diversified in our product portfolio and geographies. Our relative strength in the core markets of luxury, sports, athleisure and outdoor means that we approach H2 with confidence. The majority of our apparel sales are in the premium end of the market. This segment has higher margins and is more resilient during economic slowdown. As we look at the mid-market, we focus on the most successful brands to win with the winners. And within the mass market and fast fashion, we use discretion to win where it matters. Footwear is a similar story and has higher margins, too. It is a more sticky business and is expected to grow ahead of apparel in the medium term. The acquisition of Texon provides a further diversification to our portfolio at the premium end of the market. We are planning a Capital Market Day focused on our footwear business and the Texon acquisition. Moving over to Performance Materials. We saw strong growth with sustainability being a common theme across all segments in Performance Materials. Personal Protection, which makes around 40% of our PM revenues continues to benefit from increased worker safety standards, the requirement of multi-hazard protection and user demand for more comfortable clothing. Composites for oil and gas and telecommunication were in demand due to increased investments in oil production and the ongoing rollout of fiber optic networks across major markets. We have doubled the manufacturing capacity in our Spanish composites factory. The opening of a new composite center of excellence in Spain will help us in the development of new products for both the telecom and the energy sectors. Performance thread contains more of a traditional thread products that go into mature end markets like tea bags, feminine, hygiene and automotive. Global car production is still below 2019 levels and the transition to electric vehicles continues. Sales growth was strongest in EMEA and Asia. The U.S. continues to be held back by labor availability challenges in North Carolina. We are addressing the U.S. challenges by moving unutilized machines to a new factory in Mexico. We expect double-digit sales growth across personal protection and composites and a growth in line with GDP for the performance thread business. There were significant customer wins in automotive and military that help set the tone for the remainder of the year. As a whole, Performance Materials saw sales growth of 16%, driven by strong pricing, growth in EMEA and Asia and improving trend in our U.S. operations. Operating margins were up 280 basis points to 8.2% despite ongoing labor disruption in the U.S. We find ourselves an extremely unusual economic circumstances with inflation at a 4-year high. I'm proud to report that during H1, we have more than offset inflation through price and productivity actions. Our business model, product portfolio and premium market positioning enables us to get higher price in inflationary times. Our global scale allows us to deliver productivity within our supply chain and cost base. Coats has a well-developed label of offsetting inflation through price and productivity. On 3rd March 2022, we announced the launch of strategic projects. We said that we will invest $35 million of exceptional cash over 2 years to deliver an incremental $50 million EBIT in 2024. Majority of this incremental operating profit will benefit our Performance Materials business. We also said that this year, we will deliver an incremental $5 million to $10 million of profit from these projects. I'm pleased to inform you that we are ahead of our target and now expect to deliver $15 million this year. To demonstrate what we have done so far, let us show you a video of one of our new state-of-the-art factories that is coming up in Mexico. It will go into full production by the end of the year. Let's play the video. [Presentation]

On 20th July, Coats completed the acquisition of Texon, a leader in the highly-attractive footwear structural components market. This is a complementary adjacency to Coats' existing premium thread offering to footwear customers. This increases our presence in the highly-attractive athleisure and sports footwear segment. This is an opportunity to cross-sell our products with customers where only Coats or Texon is present. With this, both companies can broaden and deepen their customer relationships. As an industry leader in sustainability and innovation, Texon is an ideal fit for Coats. Many of the products have high content of recycled or bio-based materials, for example, cellulosic fibers, vegan leather, et cetera. Texon delivered $132 million of sales in 2021 with an operating margin of 13%. As part of the Coats Group, it can benefit from our global network, customer relationships and industry experience to grow faster. We have announced $5 million of cost synergies coming from procurement, manufacturing, productivity and back office consolidation. And with that, let me hand over to Jackie, who will present the financials.

Thanks, Rajiv, and hello to everyone on the call. Let me start by summarizing the key highlights of our financial performance for the first half of 2022. We've seen further accelerated sales growth with 19% constant currency growth versus last year. Approximately 2/3 of this growth is due to our pricing actions and better mix and the other 1/3 is volume related. Coats is a company that operates well in an inflationary market and has a well-defined and tested playbook. During 2022, we've continued to see heightened inflationary pressures in the areas of raw material, labor, energy and freight. As with previous years, we've moved quickly to mitigate these inflationary challenges by successfully implementing pricing actions and self-help programs. Our adjusted operating profit of $125 million and margins of 15.6% were both well up on last year and well ahead of pre-COVID levels. This adjusted operating profit result is largely driven by the volumes we've seen in the period as well as ongoing tight cost management and the initial delivery of our strategic projects. On cash, we delivered a robust free cash flow of $30 million, which maintained a strong balance sheet position with leverage at the period end of 0.8x. This strong balance sheet has allowed us to fully debt fund our recent acquisition of Texon, whilst keeping our leverage comfortably within a 1x to 2x target range on a pro forma basis. We've seen strong momentum on our strategic projects during the period, and we're ahead of schedule in terms of delivering the benefits. We now expect to deliver $15 million incremental adjusted operating profits during 2022. Slide 16 sets out the financial summary and our key financial metrics, which show a significant improvement year-on-year. Let's now take a deep dive on these key financial metrics, starting with revenues. Overall, the year-on-year increase in group revenues in the first half was 19% on a constant currency basis, and the strong performance was driven across both A&F and Performance Materials, as Rajiv mentioned earlier in his market commentary. Group operating profits were up 35% on a constant currency basis to $125 million as the volume benefits that we've seen delivered upside margin benefits alongside the initial impacts from our strategic project initiatives. As a result, margins increased by 180 basis points to a healthy 15.6%. I will cover the key profit lever movements in more detail shortly. On a reported basis, growth rates of both sales and operating profits were slightly lower than the constant currency basis, primarily as a result of translation FX headwinds due to the U.S. dollar strengthening against some of our key local currencies, for example, the euro and the Indian rupee. In addition, the constant currency sales and operating growth was impacted to a small extent by the adoption of hyperinflation accounting in Turkey. Adjusted EPS of $0.043 per share was up 30% year-on-year, primarily due to the profit increase we have seen. Finally, on this slide, cash generation was a robust performance, albeit lower than 2021, which benefited from some specific timing impacts. I'll give some more details on these items later. Now moving on to operating profits, and the next slide provides an overview of the movements in our group operating profits and margins during the year. Operating profit benefited from the volume upside we saw in the first half, both directly through sales, but also through more efficient utilization of our plants. We continue to offset inflationary pressures such as raw materials, freight, labor and energy through price and productivity initiatives. Whilst we expect inflationary pressures to continue in the second half, our early actions on price and productivity initiatives leave us well placed to continue to mitigate these as we have successfully done in the past. At an SG&A level, these costs remained well controlled, and we also saw the initial $5 million of benefits from our strategic projects coming through in the half. The above impact led to a healthy increase in operating margin in the period, which was up 180 basis points to 15.6%, driven by both segments. So let us now look at segmental margins on Slide 18. Both segments saw significant improvements in margins year-on-year. And if margins have increased by 130 basis points to 18.2%. This was as a result of excellent commercial and operational delivery, increased volumes and improved factory utilization, pricing actions and procurement self-help initiatives offsetting heightened inflationary pressures. PM margins are up 280 basis points year-on-year to 8.2%. Margins in this segment continued to trend upwardly and while still impacted by the U.S. -- in the U.S. by labor availability issues and labor inflation, U.S. margins have improved significantly due to the positive impact of both pricing actions and the strategic project actions that have started to take effect in the period. Excluding the U.S. business, PM margins remained double digit, albeit slightly lower than 2021 as a result of specific temporary supply chain disruption issues within EMEA, which have now been resolved. On Slide 19, we show the bottom half of the profit and loss account, and there are 5 areas I'd like to cover off on this slide. First, the exceptional and acquisition-related items of $13 million, which include $10 million spent in relation to the commencement of our strategic project initiatives, the majority of which are cash severance costs regarding actions in relation to our cost base. In addition, there are $2 million of costs in relation to our acquisition of Texon, which was completed in July. Secondly, you will see that the net finance costs were $5 million higher than in 2021. This relates in part to rising interest rates, but also in relation to large mark-to-market losses in relation to hedging instruments, mainly around sterling weakness at the period end. The third item is the continued reduction in our underlying tax rate to 30% and in line with the guidance we have issued previously for the full year. Fourthly, the loss on discontinued operations related to the exit of our Brazil and Argentina business. This consists of a $49 million of net assets disposed, $19 million of buyer payments and fees and $15 million of historic recycled FX losses that previously went through reserves. The final item to flag is the interim dividend of $0.007 per share, which is 15% above the 2021 levels and reflects the excellent first half performance and ongoing confidence that the Board has in our strategy. Moving now to Slide 20, where we see the robust cash generation for the period. As a reminder, due to our normal working capital cycles, our cash generation is typically weighted to the second half, and that remains the case this year. At an adjusted free cash flow level, we delivered $30 million compared to $40 million last year. This was a robust performance compared to historical delivery, albeit behind last year due to some specific timing impacts in 2021. For example, we paid no staff bonuses in March 2021 as a result of the performance of the business in 2020, which was heavily impacted by COVID. Our working capital has continued to be well controlled, whilst allowing for some ongoing increase in inventories to support customer service as well as the inflationary pressures due to increases in our raw material costs. CapEx remained at broadly similar levels to last year, and we continue to selectively invest in the most value-add initiatives to support future growth in the group strategy. Our closing net debt of $195 million excluding leases was higher than at the end of 2021 due largely to our normal working capital outflows in the first half as well as continued payments to our pension scheme, shareholder dividends, exceptional costs and the cash paid to the buyer of our Brazil, Argentina business. This level of net debt equates to leverage of 0.8x, which is slightly below the target range of between 1x and 2x. On a pro forma basis, if this were to be adjusted for the debt funded Texon acquisition, our leverage remains comfortably within our 1x to 2x target range. On Slide 21, we set out a reminder of the specific financial guidance in relation to the strategic projects that we're undertaking as well as the latest update on 2022 progress, which Rajiv has also mentioned earlier. For the overall project, we anticipate some $50 million of bottom line EBIT benefit to be delivered in 2024. The footprint aspects of this program will largely be focused on PM markets with the resulting material improvement in PM margins. The total exceptional cash costs to achieve these savings will be around $35 million, with the majority of that occurring in 2022 and with the remaining actions planned to occur in 2023. We are very pleased to say that the projects have made significant progress during the first half, and we are now on track to deliver $15 million of incremental adjusted operating profit this year, which is ahead of the original guidance for the year of $5 million to $10 million. Lastly from me and as with previous announcements, we've provided future modeling guidance, the latest of which is set out on Slide 22. I'm not planning to go through this in detail, but we'll be very happy to arrange follow-up calls, if you have any questions on this or the strategic project financials I just covered on the previous slide. I'd like to conclude by reiterating the excellent performance of the group in the period, the accelerating sales growth, the pricing and self-help programs that continue to offset inflationary pressures, resulting $125 million of adjusted operating profit at increased margins and the positive start to the delivery of our strategic projects. And now I'd like to hand back to Rajiv.

Thank you, Jackie. The first half of 2022 has got off to a stellar start with high sales and margin growth. We continue to accelerate profitable sales growth and transform the business to improve margins. We are deploying our financial horsepower to acquire high-quality companies in line with our strategy. Our strategic projects are progressing well, and we should deliver $15 million incremental EBIT this year. We will continue with our focus on sales growth, margin growth and cash generation. Now for the outlook for the second half. We expect to see normalized growth in the second half of the year as inventory build in the first half gives way to more typical demand patterns. We will continue to use timely pricing actions to offset inflationary pressures, leveraging our unparalleled global footprint and critical position in the industry supply chain to serve our diversified customers. We are also delivering ahead of expectations on our strategic projects to transform the business. Our focus on the premium and athleisure markets in apparel and footwear and our diversified end markets in Performance Materials position Coats well in the current macroeconomic environment. As a result of these factors, we now anticipate the group's full year 2022 performance to be moderately ahead of previous expectations. This concludes our presentation. Thank you very much for your time. I now hand back to Nick.

Thank you, Rajiv. Thank you, Jackie. We now have some time for Q&A. The session will begin shortly. [Operator Instructions]

[Operator Instructions] Our first question comes from Charles Hall from Peel Hunt.

Well done on excellent set of results. Could you start just by talking a little bit about the end markets and what do you mean by a normal level of demand for H2?

Okay. Absolutely. So if you look at the H1 sales growth, it was 19% and that 19% can be broken down into roughly 2/3 price and mix and 1/3 volume. In a normal year, typically, we get about 5% sales growth and that 5% can be broken roughly into 3% of that coming from volume and market share gains and the balance 2% coming from price and mix. So what we are seeing here is, after the significant demand surge that we saw starting in Q4 last year, ending in the second quarter of this year, it's going to start trending towards more of a normalized growth rate. Having said that, it starts to vary within sort of within the various end markets. So if you look at apparel, for example. Apparel, we will continue to see pretty good momentum in the sporting goods, athleisure, casualwear and even in the luxury segment. So I think these categories should see a continued better-than-average growth rate in the second half of the year. The fast fashion, the mid-market and the mass market segments are down, and we expect them to be down in the second half as they correct for the -- as they sort of try to balance the demand and supply situation here. Now our exposure in the mass market and the mid-market is not that high. So we are largely a premium player. And in the apparel, what we are going to see in the second half is reasonably strong growth. It's not going to be as high as in the first half, but it will still be strong there. Performance Materials, sorry, footwear. Footwear will continue to see strong growth. So it was pretty, pretty good in the first half. It should continue to see the same level of growth rates in the second half. And as you know, we had acquired Texon, which is a market leader in the footwear structural components sector. That sector broadly, I would say, is going to grow between 7% and 9% into the medium term. And that's sort of one of the attractiveness of that segment. The whole athleisure sporting goods segment is looking pretty attractive over the next few years. Performance Materials was largely a supply-constrained situation. Demand was very strong. If I look at our U.S. operations, the order book is pretty much sold out until the end of the year. The issue is labor availability and in some cases, raw materials. So it's essentially supply, which is constraining the Performance Material sector. Within Performance Materials, the end markets where we are seeing pretty good growth is in personal protection. We are seeing that also in the composites area where it's products going into oil and gas or into the telecom sector. We do have a performance thread business, which is essentially thread going into mature end markets like bedding, upholstery, feminine healthcare, teabags, et cetera, that's going to be soft in the second half, and that will pretty much grow in line with GDP. So broadly, it's kind of a mixed bag, I would say, Charles. But overall, if you kind of bring everything together, I would expect the second half growth to be more than our historical growth that we see, but it's going to be less than the first half.

That makes sense. That's really helpful. And could you just comment about -- on China? And obviously, that's the key end market for a number of your customers, obviously, manufacturing base for you as well. How have you experienced lockdowns in China? How are your customers faring? And what's the thoughts about H2 and going into next year?

Yes. So let's start with the supply side in China. So we had our Shanghai factory shut down for 2 months in the first half. A lot of our customers' factories, which are in the northeast part of China were also shut in the first half for anywhere between 2 or 3 months. There were significant delays in shipping out of China. The Shanghai port had something like 3 weeks of waiting time for ships to berth into the port. Those have started to ease now. As we got into June, July, we are starting to see those sort of delays coming down. So that's sort of on the supply side. I think the second half is going to be better than the first half. But again, if it's going to be COVID-related shutdowns, that's sort of hard to predict. But generally, the news from the ground is that things are looking slightly more normal in the second half as far as supply side is concerned. On the demand side, we -- a lot of our large customers have got a reasonable amount of the sales coming in China. It is looking soft right now. So consumer sales in China were down a bit in the first half. They are being impacted a bit by that. But they are making up by more sales in South Asia -- Southeast Asia, the U.S. and Europe. So it's a mixed bag. But I think China will start to look better after October, November this year.

Great. And last question. You've had a number of new business wins in the period. Are there any you particularly highlight?

Okay. Yes. So we've got a pretty interesting win from General Motors, which is essentially the battery tray there. It's a composite one. So that was a good win. We also had a Mercedes electric vehicle, the seats of the electric vehicle of a Mercedes Benz electric car, that was an interesting win here. And apart from that, we have had significant wins in the luxury sector in the first half of this year, PVH, Ralph Lauren. We are seeing Europe -- Europe has been a strong market for us in the first half of this year, and it's largely because of the apparel and the footwear sector in the luxury area.

Our next question comes from Mark Fielding from RBC Capital Markets.

3 questions, if you don't mind. Firstly, in terms of the strategic initiatives, which are obviously progressing faster than expected. I mean, obviously, the target is still $50 million of benefits, but are there incremental opportunities coming through? Or is it just that you're able to get things done faster than you were initially thinking? Secondly, just could you give us an update around obviously recycled thread going really well, just where you're at with some of the other products like the all natural products and where that is progressing in the development curve. And then thirdly, can we just get a little bit more detail on the Performance Materials, EMEA supply chain disruption that you talked to. Obviously, Jackie said that's all behind us moving into the second half. Does that mean that ex the U.S. Performance Materials is back to mid-teen margins in the second half.

Okay. So let me start with the first one, strategic projects. We are not changing the total quantum of $50 million in 2024. I think it's a case of getting it done faster, Mark. So the $15 million, which is ahead of the $5 million to $10 million that we had mentioned in March, is essentially also realizing the benefits faster. So that's the answer to your first question. On the recycled thread, again, continue to see demand pretty strong, $65 million of sales in the first half. We are looking at ending the year with recycled sales of anywhere between USD125 million and USD150 million for the year. Customers continue to buy recycled polyester thread. I think it's becoming even more important. And especially in the mid-market, so where we have fast fashion brands like Inditex, H&M, et cetera, they are one of the bigger sort of buyers of our recycled products, and that's actually good because that's all market share gains, and it's at a price premium. So again, this is a good example of a product that is good for the planet, but it's also good for the business in terms of profits here. With respect to the Performance Materials in EMEA, as you would remember, in the first half of the year, we had this Russia-Ukraine crisis, energy prices went up, but there was a lot of disruption in Europe starting February 24 till maybe about middle of May when things started to settle down. We lost some time during that disruption there. The energy prices went up significantly during that time. Customers were distracted in terms of engaging with suppliers like us. So we lost some time. But what has happened since mid-May till, let's say, end of June, things have normalized. We are back on track. And the expectation is that EMEA in second half is going to be back to where it should be. So this was just a momentary disruption for about 3 months caused by the Russia-Ukraine issue.

Great. And so could I just clarify in terms of the recycled thread, I mean, there's actually 2 little [indiscernible]. Firstly, I think before you've indicated around 2/3 is sort of substitution of existing sales of 1/3 of new business is that still the sort of ratio? And the second thing I was asking was actually beyond the recycled thread. Are you making progress with things like the all natural thread as in the non-plastic thread et cetera?

Yes. Okay. So the 2/3, 1/3 was actually last year's ratio in terms of recycled threads. This year, it's going to trend more towards the 60-40. And I think eventually, it's going to be 50-50. So we'll start to see more and more of the recycled thread going into market share gains where we get price and a price premium. With respect to the other bio-based threads that we have, those are still in the testing phase. They have been launched -- they are going through customer trials. And I don't expect any material sales to happen this half, but we should start to see traction in the second -- in the first half of next year.

[Operator Instructions] Our next question comes from David Farrell from Jefferies.

I've got a couple of questions, please. Just wanted to follow on from the previous question on the recycled thread, EcoVerde. The bottom end of your range suggests that you're only going to deliver sales in line with the first half. So I'm just kind of wondering what the constraint there is for further half-on-half growth? My second question was with regards to the expansion of the composites capacity in Spain. Can you just put that in context? Is Spain the only facility you have for composites manufacturing? Or how much overall do they increase your kind of composite capacity buy? And then my third question relates to what's going on in Europe and Germany, in particular with regards to potential gas rationing, how could that impact your business negatively in terms of your own production, but I think some of your competitors are perhaps more heavily skewed towards Europe than you are. Those are my 3 questions, please.

Okay. So I'll start with the last one in terms of gas rationing here. We have not experienced any gas rationing. The most likely place is going to be Germany, if it happens. And we have plans in place to actually use diesel gensets in case that happens. So for us, we would not experience any material production shortfalls as a result of energy rationing. Outside of Germany, there might be some sort of rationing in Italy. There might be some rationing in France, but we don't have any factories in France. We have a small factory in Italy. So broadly, I would say, our impact is limited to Germany at this stage here. With respect to Gotex, I'll take your second question here. So the composites factory is largely the Gotex acquisition that we've done in 2016. We have moved to a new site. We have more than doubled the capacity. The sales of this business have more than doubled in the last 5 years and profits have tripled. We are seeing significant demand coming from the telecom sector and also from the energy sector. And there's a pretty good view internally that we might have to expand and maybe move some of the Gotex production to the U.S. in the near future. So that's how it's looking like. The entire composites area is looking very attractive. In the first half, sales in composites grew 28%. It was largely Europe, and it was mostly coming out of the Gotex factory here. We don't -- we do have another composites factory in India, which is essentially an extension of the Gotex factory. And the plan is to maybe have one more identical one in the U.S. sometime next year. Your first question, David, -- just sort of remind...

Yes, my first initial question was just on EcoVerde sales. I think kind of you're talking about $125 million to $150 million at the bottom end of that range, that's simply kind of replicating what you did in the first half, if my math is correct. So I'm just wondering why isn't that going to grow in the second half?