Elementis plc (ELM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to today's full Elementis 2020 Interim Results. My name is Adam, and I'll be the operator for today's call. [Operator Instructions] I will now hand over to James Curran to begin. So James, please go ahead.

Hi there. Good morning, everyone, and thanks for joining the Elementis 2020 Interim Results presentation. And I'm James Curran, Director of Investor Relations at Elementis. And as per usual, please make the most of the cautionary statement on Slide 2. And with that, I'll hand over to Elementis CEO, Paul Waterman.

Thanks, James. Good morning, and welcome to the Elementis 2020 Interim Results Call. Thank you for taking the time to join us today. And in terms of the agenda, I'll start with the highlights and business segment performance, Ralph will review the group financials, and then I'll take you through our priorities going forward. And following that, we'll take your questions. Starting on Slide 5. The key messages for this morning are fairly straightforward. Our response to COVID-19 has been comprehensive and swift, focusing on the needs of all of our stakeholders. Our operational performance has been resilient as our plants have run well throughout the first half. From a demand standpoint, we had a solid first quarter followed by a much weaker second quarter. May was our weakest volume month followed by modest improvement in the months since. We continue to have significant liquidity available to us. And despite COVID-19, we continue to implement our strategy, focusing on innovation, growth and efficiency. Last, today, we're pleased to share our sustainability targets in 2030. On Slide 6, I'll start with safety. At Elementis, we continue to put the health and safety of our employees first. In the first half, we had 6 reportable injuries, 1 lost time accident and no reportable spills. While recordable injuries were relatively minor, like a fractured finger or eye irritation from dust, they're still painful, and we want to prevent them from happening. COVID-19 has proven to be an unprecedented challenge, and I'm proud of how our people have responded. In our plants, we've implemented social distancing and significant hygiene protocols that have allowed us to continue to work safely and meet our customers' needs. Going forward, we will continue to invest in training our people and maintaining our assets to further improve safety performance. To that end, we recently launched the TogetherSAFE Program, which provides a framework for focused, continuous improvement that strengthens our safety culture and supports our journey to 0 injuries. On Slide 7, one can see that in responding to COVID-19, we've considered all of our stakeholders. Our top priority is to do the right thing for our employees, safe in the knowledge they will look after our customers. Working remotely has been successful, supported by material digital investments we've made over the last few years. In addition, we've provided enhanced well-being and additional communication support to help our people manage through these challenging times. We've also taken decisive action, reducing in-year cost by $10 million and further conserving cash via active working capital management, streamlining capital spending and suspending the dividend. These actions, combined with the recent covenant relaxation, provide additional financial headroom to navigate through these challenging times. For our customers, we've continued to provide reliable service to support their production needs. With the exception of brief stoppages at 2 sites in China and 1 in Brazil, our 22 global production sites have operated well with no raw material shortages and ongoing product fulfillment. Furthermore, this has been supported by enhanced digital connectivity, as highlighted on Slide 8. Delivering innovative solutions to our customers is one of our core values. And while the first half has been challenging for customers and distributors, digital connectivity has worked to strengthen our relationships. In the first 6 months of 2020, our technical leaders delivered online training and innovation workshops to more than 7,000 employees, at 400 customers across 60 different countries. These engagements have supported our strategic priorities, advanced innovation projects and generated incremental business opportunities. Turning to Slide 9, I'd like to cover first half achievements. Although COVID-19 represents an unprecedented challenge for Elementis in the wider economy, we remain focused on implementing our strategy. Against innovation, we launched 5 new products across Coatings and Personal Care in the first half and are on track to launch an additional 21 in the second half. Our new, high-efficacy AP Actives have made good testing progress and will launch later in the year. And our new talc barrier coatings additives for recyclable food packaging have made good progress with multiple partners. And we're now engaged in testing and production-scale trials. On growth, implementation of sales force, combined with the ongoing high-grading of our sales organization, has created enhanced visibility of activity and improved focus on new business development. In the first half, we closed $20 million of new business against a full target of up to $35 million. The expansion of Talc outside of Europe has continued, with sales up over 20% in China. And in AP Actives, we outperformed the market, growing volume 11% in the first half. Turning to efficiency. We've accelerated the delivery of our $15 million medium-term savings program, $5 million of benefit from the 2019 organization restructuring is on track. $10 million of supply chain cost savings will now be realized 1 year earlier, in 2021. In addition, our ambition to deliver $7 million of targeted working capital reductions this year remains on track, making $30 million of total savings since 2017. Now let's look at business segment performance, starting with monthly trading on Slide 11. As previously disclosed, we had a solid first quarter with volumes up low single digits. However, as expected, the second quarter saw a significant deterioration due to COVID-19. Volumes reached a trough in May, down nearly 30% versus prior year, and sequentially recovered in June, finishing down a more modest 15% on the prior year. We have good visibility on July results, and while things have modestly improved, we continue to remain below prior year comparatives. Turning to Personal Care on Slide 12. Revenue was flat on a like-for-like basis, with the decline in Cosmetics, offset by growth in AP Actives. On a reported basis, revenue declined 11% due to the sale of a dental gypsum plant in late 2019. Adjusted operating profit declined from $23 million to $20 million, primarily due to lower volumes in cosmetics, our highest margin business. As you can see on Slide 13, Cosmetics declined by 2% on an organic basis, with improved price mix, offset by volume declines in Q2, as COVID lockdowns impacted Europe and North America, our 2 strongest geographies. Market conditions for Color Cosmetics are challenging. With restaurants and theaters shut, airports and retailers operating at much lower levels, consumers simply don't have the opportunity or in some cases, the means to buy high-value lipstick or mascaras. This is particularly true for the luxury segment, which is a focus area for us, as these items tend to be purchased in-store rather than online. In addition, spending time at home, not going out, can also reduce consumption of these products. While this is an unfavorable short-term dynamic, the intermediate potential of our Cosmetics business is unchanged. And in the first half, we've made progress to capture growth opportunities. We've taken the opportunity to optimize our route to market to increase the proportion of our business at high-value direct accounts, such as Clarins and Chanel. This shift enables us to maintain a closer customer relationship, which better supports future growth and improves our margins. While we will always utilize distributors, we'll continue to optimize a direct distributor balance over time. In Asia, our Cosmetics sales grew by 5% in the first half, with good progress in China, up 19%; and in Japan, up 53%. We, of course, remain relatively underweight in the Asia region and to support further growth, we've invested in additional marketing and technical staff at our Shanghai location. And finally, there is an increasing pull from consumers to buy cosmetics with clean and natural ingredients. This is a strong tailwind for our recently launched BENTONE LUXE and HYDROCLAY new products which target the growing skin care segment and open up new markets in our Personal Care business. In AP Actives on Slide 14, we achieved double-digit volume growth with continued positive momentum to gain market share. This contrasts with the category that's expected to be flat for 2020. The start-up of the new India plant and focus on developing innovative new products will be the next stage of the journey as we improve margins. The fundamentals of the India project are compelling. It will materially reduce our production cost, mitigate tariffs and provide enhanced access to growth markets in Asia. As a result of the shutdown of the Indian chemicals industry due to COVID-19, start-up is now planned for mid-2021. Innovation is also critical to long-term success. Our customers look to us to develop solutions that will support the launch of superior, distinctive new products. We've got a strong pipeline of innovative new products, focused on improving in-product performance, lowering operating costs and improving sustainability. Turning to Coatings on Slide 15. Our sales were down 7% versus prior year, with growth in the first quarter offset by a significant volume decline in the second quarter. Pricing and mix improved versus prior year. COVID-19 resulted in weak demand across industrial applications such as automotive and protective coatings. By contrast, decorative coating demand was relatively robust, particularly in North America, as home renovation activity, combined with retail stores remaining open, led to healthy performance. Despite this challenging market backdrop, the positive impact of our Coatings transformation continued to flow through and offset these headwinds, as margins improved from 14.6% last year to 15.5% this year. You can see this on Slide 16. Over the last 2 years, we transformed our Coatings business, moving to a simplified global team with an aligned strategy, using global key accounts management to better grow with our biggest customers, simplifying and high-grading our product portfolio with a focus on distinctive, high-value product platforms and reducing fixed costs by headcount reductions, supply and logistics efficiency and route to market optimization in Asia. These self-help actions have improved underlying profitability, and we are now better positioned to deliver growth going forward. In addition, given Coatings represents 45% of Elementis Group revenue, it will play a big part in helping us to achieve our medium-term operating margin targets. In Coatings, we have clear technology platforms to gain share, as highlighted on Slide 17. Hectorite and Talc are unique resources that are complementary and highly valued by our customers. In Industrial Coatings, we have the rheology modifiers and high-value additives to enable the transition from solvent-borne to waterborne technologies. Our organic thixotropes enhance the formulation of next-generation additives and sealants. They deliver performance, lower manufacturing costs and improved sustainability to our customers. And in Premium Decorative Coatings, our [ non-set ] technology can deliver one-coat hide, enhanced stain resistance and reduced sag, with improved environmental credentials. In a difficult market environment, we continue to develop new business, closing $10 million in the first half, and we're on track to close $17 million in 2020. This momentum is supported by a pipeline of high-value new products and our focus on accessing new end markets. Bottom line, while it took some time and effort to transform our Coatings business, it's now well positioned for future success. Turning to Talc on Slide 18. We continue to be very excited about our Talc business. It has strong fundamentals and compelling future growth opportunities. Nonetheless, in the first 6 months of 2020, demand was significantly weaker than prior year. Automotive and paper plant shutdowns materially reduced sales of long-life plastics, technical ceramics and paper. Telford coatings was quite stable throughout the first half as we gained market share. To be clear, all customers were maintained and our pricing was unchanged. This was solely an issue of reduced market demand. As a result, sales fell 16% versus prior year to $61 million. Operating profit fell to $6 million, representing a margin of 10%, as stable pricing was offset by reduced volumes. Let me say a bit more about automotive demand on Slide 19. Talc additives are used in this area for 2 purposes: First, they help to strengthen plastics and support vehicle lightweighting; second, they are key components for catalyst converters that are critical to reduced vehicle emissions. The medium-term outlook in these areas is positive. Consumers, producers and regulators all want lighter vehicles with lower emissions. However, plant shutdowns in Europe and North America in the second quarter reduced vehicle production by up to 70%. Given that 25% of Talc's revenue comes from long-life plastics and technical ceramic automotive applications, this negatively impacted on our performance. That said, these plants have now restarted, and we're seeing a strong sequential demand improvement, albeit at demand levels lower than 2019. Taking a step back on Slide 20. The fundamentals of the Talc business remain very strong. We're the #2 player in a niche global market with only 3 players of scale. We have a fully balanced and have a fully integrated value chain with global reach. Starting with long life talc deposits in Finland, through the unique processing and formulation capabilities, and supported by high levels of technical service that our customers value highly. And Talc follows the performance additive logic. It represents a small percentage of formulation cost, but adds critical performance elements to the end product. As a result, customer loyalty remains strong. We've experienced no customer losses in the first half, and we were able to close $4 million of new business. Looking forward, our growth opportunities are unchanged from the CMD in November. With 80% of our business in Europe, there's significant opportunity to grow in both Asia and the Americas. In the first half, we grew over 20% in China versus prior year. Furthermore, we expect to continue growing market share in high-value industrial application, such as long life plastics, technical ceramics and the emerging Barrier Coatings segment. And last, the delivery of $20 million to $25 million of revenue synergies remains on track. Turning to Chromium on Slide 21. Revenue declined 12% to $78 million, reflecting weak volumes, negative mix effects and softer rest of world pricing. Demand from users in areas such as automotive parts, industrial machinery plating and refractory fell, particularly in the second quarter, as COVID-19 reduced economic activity in both Europe and North America. Pricing was also down in the prior year, reflective of lower capacity utilization and price competition. As a result of significantly weaker utilization and pricing headwinds, margins were around 4%, comparable with levels last seen in the 2009 financial crisis. Before moving on, it's worth expanding on the business dynamics on Slide 22. First, Chromium industry utilization is down. We estimated it averaged under 70% in the first half of 2020, the lowest point in over a decade. This is impacting unit margins for our business outside of North America. By contrast, our North American margins have been remarkably stable. We maintain an extremely strong competitive position as the only producer in the region, and due to our highly valued proprietary delivery system that materially reduces our customers' product handling risks. The impact of all this is that our Chromium returns on capital employed are at a historical trough of about 10%. However, as demand returns, particularly in North America, we should see improvement. Finally, like Chromium, the Energy segment had an extremely difficult first half. Revenue at the half was $14 million, down 50% versus prior year. Due to COVID-19-related demand declines and excess supply, oil prices fell over 30% in the period. And drilling came virtually to a halt, with the rig count down 50% in North America. With lower volumes and lower cost absorption, a loss of $2 million was recognized in the period. Going forward, while oil prices will increase at some point, it's hard to see North American shale activity fully recovering. Therefore, we're restructuring this business to align with the new market reality, and I'll have more to share on that in the future. With that, I'll hand over to Ralph.

Thanks very much, Paul, and hello, everyone. So turning to Slide 25 on group revenue. While this fell 14% on a reported basis, excluding the impact of disposals and FX, like-for-like revenue declined by 11%, driven almost certainly by weaker volumes as pricing remains strong. After a steady first quarter sales performance, all of the segments saw significant 2Q demand-driven declines. Looking at group adjusted operating profit on Slide 26. This declined by 34% on a reported basis and 33% on an underlying basis with resilient performance in Coatings and Personal Care offset by weakness in Chromium and Energy. This profit reduction was due to demand reductions that were mitigated by delivery of cost savings. And on Slide 27, on cost savings, you see there are 3 buckets, 2 of which will contribute to 2020 performance. First, there are cost savings in 2020 in response to COVID-19. With travel and entertainment close to 0, trade shows canceled, manufacturing costs aligned to the lower demand environment and lower variable incentivization, we plan to save $10 million in 2020. A proportion of these costs, but not all, will return in '21 if conditions continue to improve, but they will help our in-year 2020 performance. The second bucket is $5 million of organization restructuring savings. This started with reviewing our transformed business portfolio in 2019 and taking steps to ensure our existing global structure was both efficient and effective. The result was an alignment of job levels, widely reporting spans with fewer layers, which promoted faster decision-making and a more efficient execution. Now these actions taken at the end of 2019 have resulted in a lower headcount of approximately 100 full-time employees, and they're delivering $5 million of savings in 2020. And the final area, as communicated at the CMD, are the $10 million of medium-term supply chain savings, delivery of which, as Paul mentioned, has been moved forward 1 year to 2021. And turning on to Slide 28, on the supply chain savings. The $10 million will come from 4 areas. The first area is related to aligning our global capacities with our volumes. We're looking at where our products are made, where they should be made most efficiently and to the lowest cost. We're looking at capacities, utilization levels, logistics costs, product flows and production [ debts ] and executing on all of these actions. Second pillar is Chromium, where we're implementing work process redesign to lower our operational costs. This work will be completed by the end of 2020 and contribute to our savings goal. On procurement, given we are a larger business following 2 material acquisitions, we reviewed our spend and actioned many possibilities on savings. For example, on transportation and logistics, we've consolidated our operations, thereby leveraging efficiencies across our global network. And finally, as discussed, we're investing $20 million in a new manufacturing site in Mumbai that will lower our manufacturing costs, avoid tariffs and increase our proximity to Asian growth markets. Given the progress we have made, we feel confident we've been able to deliver the full savings in 2021. Now turning to cash flow on Slide 29. In the first half of 2020, we generated $28 million of operating cash flow. That was down on the prior year with tight CapEx management, offset by lower earnings and working capital outflow, which is fairly typical of our usual seasonality. And it's worth noting that compared to June 2019 levels, our working capital in total is down around $24 million. Looking ahead, we are planning on our working capital inflow in the second half, helped by delivery of a $7 million underlying improvement, which remains on track. Below operating cash flow, our cash items are straightforward. As a reminder, we have no pension cash top-ups for the remainder of this year, given the scheme was in surplus of the last triennial valuation. The next review is scheduled for completion in 2021. The $7 million of one-off items primarily related to cashouts associated with restructuring activities that we're undertaking in 2019. Our net debt reduced from $509 million at the end of the first half last year to $453 million. That's in line with the position at the end of '19 and represents a ratio of 3.1x net debt-to-EBITDA. And staying on leverage on Slide 30. Elementis is a highly cash-generative business. And as the graph shows, we have a long track record of healthy cash conversion and cash generation. In the second half of 2020, we expect strong operating cash conversion will enable us to significantly reduce our net debt. On liquidity, we've got over $300 million of cash immediately available, which is ample headroom. Now you would have seen that a growing concern of material uncertainty has been noted. Now I want to be crystal clear why it's there. It relates purely to severe downside scenarios in 2021. As many of you know, our net debt-to-EBITDA covenant goes from 3.75 in 2020 to 3.25 in 2021. Now under a number of conservative scenarios, we do not expect any covenant issues in 2021. However, in the most severe scenario, which has to assume no extension of our 2020 covenant levels into '21. The result of levels of leverage could pose an issue and hence, the growing concern wording. So that's what's generated the material uncertainty in the note. In practice, I need to emphasize that we are confident of the green covenant suspension from 2020 levels into 2021, if we decided to do so. As you know, we agreed a 2-period waiver of only 4 months ago in March, and we have a constructive relationship with our lenders. Moving on to CapEx. As you can see on Slide 31, we've reduced our pro forma CapEx spend from just under $60 million in 2018 to $45 million for 2020. Now whilst control over the total spend is important, we've also made good progress on the mix. Today, we're allocating close to half of our CapEx to growth in productivity projects compared to just 25% a few years ago. This mix improvement has been enabled by changes to our portfolio, namely the disposal of assets such as Delden, Jersey City and Changxing, which together absorbed over $10 million of CapEx a year, nearly all the expense on maintenance and compliance. What are our priorities on CapEx in 2020? While we're confident in our cash-generating capability and the high-quality discretionary projects in the portfolio, we continue to plan to invest $45 million in the business this year. The AP Actives plant in India is a key strategy enabler that will absorb around $10 million of this spend this year. In Finland, we're investing in a new ball mill to improve the reliability of our talc processing facilities. And in [ nutri ], our hectorite mine in California, we're automating our hedge fund assets to improve efficiency. And finally, Slide 32 on adjusting items. There was $77 million of adjusting P&L items, of which $7 million are cash-related. The bulk of the adjusting items relate to $60 million of noncash impairment of goodwill. In Energy, we've impaired all of the remaining goodwill in the business, representing $27 million. That's reflective of structurally weaker long-term demand conditions, particularly in North American shale. And in Talc, the fundamentals of the business remain very strong. However, COVID-19 has impacted near-term profit delivery. And now taken with an increase in the weighted average cost of capital means we've concluded that a $33 million impairments of goodwill has been recognized, representing approximately 5% of the carrying value. The other main adjusting items relate to the amortization of acquired intangibles, a $4 million increase in environmental provision, primarily due to lower discount rates and $2 million of business transformation costs. And with that, I'll hand back to Paul.

Thanks, Ralph. So to summarize our performance on Slide 34. We continue to stay focused on the health and safety of our employees. May volume is the weakest month, and we've seen modest sequential recovery since. In spite of COVID-19, implementation of our innovation, growth and efficiency strategy is on track. We're extremely focused on cash generation to materially reduce debt and preserve our ample liquidity. And we're absolutely committed to deliver the November 2019 CMD performance commitments. And I'd like to remind you of what we said on Slide 35. Personal Care, Talc and Coatings represent over 80% of our profits. These are premium, performance-additive businesses. The value chains across these businesses are similar as we transform advantaged hectorite and talc resources into high-value additives via distinctive processing capability, formulation development expertise, consistent quality and very high levels of customer service support. Taken together, what we do ensures that our customers' end products perform better, and this is what we mean when we speak about enhanced performance through applied innovation. We believe each of these businesses offer strong potential for growth. In Personal Care, we have great potential to grow in Asia, to penetrate the Skin Care segment and innovate in AP Actives. In Talc, we'll globalize this business and further penetrate long-life plastics, technical ceramics and the emerging Barrier Coatings segment. And in Coatings, we're now repositioned as a nimble global supplier focusing on providing distinctive new products that improve end-product performance, enhance sustainability and lower our customers' operating costs. This is a business portfolio that is well positioned to grow. Our focus on innovation, growth and efficiency translates into clear medium-term performance objectives that you can see on Slide 37. First, we expect operating margins to improve to 17%. Second, we anticipate our already strong levels of operating cash conversion to remain at over 90%. And finally, we expect our cash generation profile to take us under 1.5x net debt-to-EBITDA. These ambitions are unchanged from our November 2019 Capital Markets Day, and we'll remain intensely focused on their delivery. Turning to Slide 38. Last subject I want to discuss today is sustainability. As a global company, our impact in the wider environment is also at the forefront of our minds. In this regard, our products are well positioned. In Personal Care, our natural hectorite clay is an attractive alternative to synthetics. In Talc, our products help to reduce the weight of vehicles and thus, lower emissions. And in Coatings, our additives facilitate the transition from solvent to waterborne formulations, thus reducing environmental impact. In recent years, we've made good progress on sustainability. We have not communicated explicit and specific goals. Now is the time to do that. Therefore, today is an important milestone for Elementis as we introduce new environmental targets. Our targets on Slide 39 are as follows. By 2030, we aim to reduce our GHG emissions by 25%, improve our energy efficiency by 20% and to reduce our water usage and waste output by 10% each. These targets are set against the 2019 baseline and will be reported externally every year so that our progress can be monitored. Delivery of these targets will be supported by several key projects that we've identified and set in motion. Actions such as streamlining our manufacturing footprint, doubling the installation of our chromium kilns and better managing energy usage, will have a material impact on our GHG emissions and our energy efficiency. On Water, we have projects to optimize usage at our plants and create closed-loop systems where possible. And on waste, we'll be recycling more of our products for captive use or monetizing them where possible. The ultimate goal is to be carbon-neutral, and these targets represent our first step on this journey. With all that said, Ralph and I will be happy to take your questions.

[Operator Instructions] Our first question comes from Andrew Stott of UBS.

A couple, really. First of all, can I go straight to Slide 31? I'm slightly perplexed as to why you'd want to be spending $40 million-plus midterm? I get this year because you've got the India plant still underway. But I would assume utilization rates are quite low across the group. You have maintenance CapEx of $20 million. And of course, given the balance sheet, I'm surprised to see you committing to that level of growth on CapEx. So I wondered if you could respond to that question, please. The second question is a contingent liability comment. I know from the release there's issues that may take a cost of, I think, $19 million. I wondered if you could just elaborate on that? And also, is that a new issue or is that me just not noticing last time?

Sorry, Andrew. What was your second question again?

There's a contingent liability statement in your notes, and it's around potential employee costs of up to $19 million as the maximum. I wonder if you can comment on that. And is that a new development?

Okay. Fine. Yes. So I'll take the first one, Ralph, and you can take the second or add anything you want to the first. Andrew, we look at the CapEx spending, and we've streamlined it, I think, fairly considerably. If you look at the 2018 pro forma, the spending is down 22%, 23%. It's the first thing I would say. Secondly, we see a really good slate of growth and productivity opportunities and very fast payback. Very, very good projects. And so we've sort of said $40 million, $45 million is kind of the shape of what we expect the spending to be. I would tell you that if we didn't see that, we would be perfectly happy to spend less. This isn't about spending to a number. It's about spending to the opportunity. And the opportunity that we see is in that space. Ralph, anything you would add to that or do you want to move to number two?

Yes. On the contingent liability, Andrew, yes, it's a disclosure very much in line with the disclosure we made at the end of last year, actually. So there's not been any major movement. It's all around the EU state aid case that a number of companies are facing. We've sort of ranged the potential contingent liability between 0 and $19.8 million. So there's no actual substantive change on the last disclosure on that one.

But just practically to understand it, is it a case that you -- that estimate of the cost is related to reorganizing the employee base or something else?

No. No, it relates to sort of EU state aid relating to finance companies. And so the EU filed against the U.K. It's been going through the courts. So a number of companies are now having to assess the potential impact of that. So it's not to do with our employee reorganization. It's to do with the finance cases. And some of the potential liability revolves around significant people functions, which is why the people -- Elementis is mentioned there. It's really to do with the tax -- potential tax liability.

So it's tax in the end, yes?

Yes. We're pretty confident of -- just to manage our way through that one.

Our next question comes from Matthew Yates of Bank of America.

I've got 2 questions. The first one is on the Coating business, where you seem to be making good progress there in transforming the assets. It's a bit of a hypothetical question, but if you haven't -- if you didn't have the revenue headwind, how much more margin expansion do you think you would have printed? Or put another way, in a more normalized environment over the midterm, where do you see margins, specifically in Coatings, trending to? The second question, I guess, is mainly for Ralph, given that he mentioned it in the remarks. But this statement about scenario testing and in a downside, casting doubt on the ability to be a going concern. If the recovery in July has stalled a bit, per your slides, and you can't be sure about lenders waiving covenants further next year, at what point does the Board really have to consider raising fresh equity to put this business on a more secure footing?

Thanks, Matthew. So on the Coatings question. It is a hypothetical, for sure. But as we see it, the quality of the product portfolio as well as the execution is way, way better. And of course, the cost reductions have come through very nicely, and we're not going to give back any ground there. So I would think in a more normalized environment, Coatings is a business that helps us to exceed that 17%-plus. I feel very comfortable saying that. So -- which was the whole idea, frankly, of the transformation of that business. We felt that it could perform a lot better with a higher-quality sales force of their portfolio of products and really a much more focused strategy. Ralph?

Yes. Matthew, on your question on sort of downside cases, equity raise. We've worked on a number of scenarios, and our base case is very much in line with sort of the current environment. We've got quite the visibility through the next 6-or-so weeks. We're not assuming any major uptick, by the way, in the rest of 2020. In our sort of downside cases, you really have to assume a second COVID impact in our [indiscernible] you're referencing, and that gets sustained. You'd also have to assume we don't pull any levers on CapEx and costs. And as you mentioned, you also have to assume that there wasn't a reactivation. So that is a very severe case with those assumptions. As we stand at the moment, we're doing everything we can to control what we can control. We've got ample liquidity in the business. We're generating cash. We believe we're going to reduce debt at the end of the year. And in that context, we don't think an equity raise is what we need at the moment. Clearly, we always continue to consider things in various scenarios. But where we at the moment, we've got very ample liquidity and the good cash generation should enable us to do -- weather the storms ahead of us.

And Ralph, so while I've got you, you took a couple of impairments today on Energy and Talc. Just on the Talc one, if I understand this correctly, you've raised your discount rate. I'm just wondering how your view of that business has changed above and beyond any sort of cyclical profile of cash flows. By raising the discount rate, have you changed your perception on the inherent risk or quality of this asset?

Absolutely not. So I mean you're definitely -- you're right, the discount rate has raised from 9.5% to just over 10.5%. That -- the discount rate for CGU is determined in conjunction with the valuation experts, and it relates more to the equity component. But our view of the long-term health of the business is fundamentally unchanged. I mean the 2 impacts that have led to the impairment are one, that black change; and two, the short-term impact on our cash flow -- on short-term cash flows on COVID. Our long-term view is that the business remains unchanged in its prospects. It's the #2 global player in a niche market. We've got a fully integrated value chain from line to customer. We've got a really focused sales team. We've got great opportunities to grow outside of Europe. We've got really good new applications in Talc and ceramics, Barrier Coatings. And also, we're generating the synergies that we were looking for, both in Talc sales and also, by the way, in Coating sales. So our view of the business is unchanged. So that, I think, is something which underpins our view of the future.

Yes. Yes, I can't say it better than that.