NV Bekaert SA (BEKB) Earnings Call Transcript & Summary

Good afternoon or good morning to our analysts, shareholders, investors and other participants on this call. Please be informed that the meeting will be with Oswald Schmid, CEO and Taoufiq Boussaid, CFO, will guide us to the news that we are sharing today, including our business context and priorities, results for the first half of 2022 and our outlook and ambitions. I now give the floor to Oswald Schmid, CEO.

Thank you, Katelijn. Good afternoon or good morning. Hello, everyone. A warm welcome on behalf of Taoufiq and myself. Happy to share with you the results of the first half of 2022. I will also give some insights on how we perceive the ongoing macroeconomic development. Now we are moving Bekaert to the next level in the strategic transformation. But first of all, let's have a look on the financial robustness of Bekaert through some figures of the first half of the year. Delivered robust sales growth, you see a plus 24% in an environment, which, of course, was also guided by lower volumes, by inflation, but a very strong pricing. The underlying EBIT was included last year. And here we have set a mark -- a remark, we know that first half year of '21 was an exception one. We are here on the same base as we had last year. The ROCE continued to exceed 0.88. These results and the financials are always an outcome of the results, what we do, reflect the focus of our actions that we have made us more resilient to the economic cyclicality, and those actions were to continue the strong price realization, further work on the excellent operational performance, leveraging the benefits from our global footprint and local services for our customers. And further, though, of course, this might be a smaller part, capturing already short-to medium-term growth opportunities of sustainability and innovation trends, and I will come back on this, moment. Looking at the financial parameters. And here, you see we have compared the last [indiscernible]. We achieved strong and constant sales growth up to 24%. And the underlying EBITDA compared year-on-year, as shown in an exceptional year, in absolute amounts, of course, from '21 to '22. The net debt leverage below a factor of 1. And there's a robust growth in the net results with an EPS earnings per share increasing by 14% to EUR 4.16. And of course, Taoufiq will go a little bit more in the details of the financials, but I would like to say quickly and summarize the conflicts of the market environment in which we have achieved these results. The environment was very turbulent, and is very turbulent, with wide-scale macro imbalances, not only for us, for our customer, yes, indeed, for all of us. And we see it every day in the news that we experience this [indiscernible], very high inflation across all input costs, changes in the monetary policy as a reaction to the inflation as the energy shortage crisis coming up more and more. And on top of the shortage of materials is labor and logistic issues. We are seeing the impact of stringent COVID-19 lockdowns in China for many months. We have seen that for many weeks, the factories maybe have been closed, people have been in a kind of closed loop production, in the factories living and working. There is the war more than 5 months continuing, Ukraine and Russia. And we see in some areas, weakening economies. But however, we see also tailwinds, positive developments, that create real and new opportunities. The reverse globalization [indiscernible]. And this is a benefit for Bekaert because being present on a global scale, we can further utilize this setup to serve our customer better. The energy transition [indiscernible] towards renewable energy sources, such as wind and hydrogen. But moreover, this strong trend to energy independence becomes crucial particularly for the concerns, for example, Russian gas to Europe, and this will trigger even more investments in some special [ kind ]. In addition, this sustainability trends and decarbonization will benefit other markets and investments as well, such as low-carbon constructions. And we also see the electric vehicle trends going. It's a growing market with good opportunities for offering our products in this area. Stimulus programs in U.S., mainly utilities plus recently announced also in China, EUR 220 billion, mainly in infrastructure and automotive, they will support and should boost the economy activities and demand in this year. So now how do we deal with all these headwinds and tailwinds, by we remain focused on our value creation channel. And how do we continue to Perform-Transform-Grow. You might remember, we started this in 2020. And we have made significant progress in a turbulent environment in performing and transforming our business. And it has proved to be truly a value creating for customers, make them successful; for people, to attract them to work for us; the society, of course, for the return of the shareholders. We see this value creation already benefiting all the stakeholders. When we talk on the customers, we see more and more long-term supply agreements. We see more and more customers joining in development contracts. We, of course, see the supply continuity through the crises for -- global leadership in the areas where we're in with local presence. And to return value to shareholders by increasing their dividend [indiscernible] 50% and the continued share buyback which we have. This was the Perform-Transform-Grow, as we called it, 1.0. Meaning perform, strong execution, focus in key performing metrics, this can be on P&L, business can be balanced. This can be [indiscernible] setting up innovation, digital sustainability as a key lever for growth. Grow was about putting the seeds of growth, building positions in hydrogen, low-carbon concrete. And now we are taking it to the next level of Perform-Transform-Growth, and we call it 2.0, with a kind of dual track. The first one is strengthen the core where we're in for a long time, which, of course, is the absolutely main part. But there's a second part slowly developing, and this is really where we say in the performance, strengthen the core, further improve the business mix. Let's look continuously, reposition with the customer. In the transform area, it's about creating smart, sustainable safe solution by expanding our digital beyond-steel alternatives and services for offering in the key markets. Growing means leadership in target markets, which we see as a future [indiscernible]. So that's the biggest core we want to strengthen. And then we see the first seeds, I would say, we plant the first seeds in the Bekaert Beyond. The strategy focus, and this is our Core and Beyond approach is really aiding the future growth of our balanced portfolio. Our objective is, what I said before, value creation for all stakeholders, strengthen, optimize the core business where we have in many areas, we are absolutely the trusted and preferred supplier of steel wire applications. And as mentioned many times, with a global footprint serving the customer. But we want to grow being a leading solution supplier in selected markets. Give me -- allow me just to give you 3 examples. The first one is enabling the energy transition through renewable electricity, power infrastructure and hydrogen production. Another example is facilitating urbanization with green and high-performance solution in the areas of construction, CO2 reductions. And of course, the electric vehicle, as also mentioned before, they offer as well an offering we can give to the customer. It is, of course, translated in, in the half year, focus areas here in '22, leveraging discipline on cost inflation and making sure that all our actions in plan are executed. We are continuously working on the portfolio management outlook, which are the business which gives us the return we are aiming for, continuing the operational excellence and customer intimacy. And then the second part is to look where we can add in the area of low-carbon concrete reinforcement solutions, so we can contribute to decarbonization where we can help on the energy transition. And we have project wins in offshore wind farm tenders, and I will give some examples later on. And further building a leading position in the hydrogen electrolysis technologies. We're expanding our position in energy utility markets in the U.S. Here this year, chance to grow further, and the area of electric vehicles, for sure, will give us some more areas for innovation. Smart, sustainable and safe solutions and wins. And I will just focus on a couple, 2, 3 ones. And here, you can see on top of the map, we are implementing the first SigmaSlab elevated construction programs with our partners CCL in Norway and Germany. This is a low-carbon concrete for elevated slabs that Bekaert [indiscernible] 2 ways. The first one, it's much easy to restore. It reduces the CO. It reduces also CO2 [indiscernible]. On the right side, last week, and I think we're very proud of that. We concluded the first synthetic ropoes contract with MingYang Smart Energy, and this is China's leading wind turbine manufacturer. We deliver synthetic mooring lines for the newest type of offshore floating turbine. And in the middle, it's also a project win, but it's a very prestigious award win, Bekaert won the Tire Manufacturer Innovation of the Year award at the TireTech in Hannover, [indiscernible]. Well, this is, I would say, a very recognized award here. And it's about cobalt-free. Of course, cobalt is maybe not one of the materials you want to use in future. And this would allow tiremakers to make their products entirely cobalt-free. So altogether, exciting projects that illustrate that the world is moving to smart, sustainable and safe solutions, but also an illustration of Bekaert's contribution presence for exciting projects. Last but not least, a small update of our global presence. You see that the world is quite covered with approximately our manufacturing bases, offices, technology centers, engineering centers. And when we look in the first half year, how was the geographical allocation? 39% was EMEA. And when we take North America and South America together, it's about 36%. And followed by Asia-Pacific area, which is 25%. From the consolidated sales by industry, of course, in automotive, [indiscernible], but many other applications like vipers or window regulators that's all together. It's the very strong one. Construction is coming up more and more. And I think energy and utilities will be, for sure, the one which we see much more growing. So now, but I think it's time to Taoufiq to look into the figures, and I'm handing the floor to you.

Thank you very much, Oswald. Good afternoon, everyone. Again, my pleasure for this opportunity to take you through some of our key financial highlights for the first half 2022. I would like to make just very quickly a couple of disclaimers to elaborate on the context before jumping into the figures. So as you know, during the first half of 2022, we cannot say that we were evolving in a normalized context. So the situation, the slowdown of the economy in China has been further exacerbated. More importantly, I mean, the effect of inflation continue to increase. The post-pandemic situation combined with the war in Ukraine have made the environment more complex. So it was overall a very challenging, volatile and complex environment to navigate, and our performance needs to be interpreted in this context. The second small disclaimer is that most of the comparisons that [ we make in the ] discussion, we're referring to H1 2021. And as you may remember, H1 2021, we posted a fantastic set of results. So the bar was very high. And as you can see, for many KPIs, we have managed to match or even beat many of results. So with that, I will jump into the sales. I will comment on the overall sales for Bekaert, and then I will elaborate on the specific business unit performance. So our consolidated sales have -- grew almost 25%. So a significant expansion of the top line, our consolidated sales standing at EUR 3.5 billion, almost there as well, a significant boost for the last 6 months. And with these volumes, we are hitting new milestones and another record. So this performance is [indiscernible] to deliver almost 0.5 billion incremental sales compared to the same period of last year. So a very strong set of results, which have been crystallized by our continuous focus on better segmentation, product portfolio innovation and as well as reduced presence in lower-margin applications, while our active pricing management has allowed us to mitigate the impact from the inflationary effects that we have seen so far. So we have approached our markets from a very -- with a lot of discipline. And this is how we have been quite successful, and we will see it later when we discuss the gross margin. We have been able to translate many of the cost increases in input costs in a quite successful way. So as I said, I will elaborate later on, on the specific units, I'll jump directly into some of the P&L metrics. And I will comment first on the cost of sales. So as you can see, our cost per sales grew almost by 30%. This is a direct impact of the inflation we have been suffering from actually, since 2021, it's touching really all categories of input costs, so ranging from labor down to raw material, utilities, transportation and obviously energy. However, how -- as I have explained it, we have been working hard on the price and the mix, and this has allowed us to absorb significantly, if not all of the impact, that we have been suffering from. So not only the increases from the inflation, but we have also compensated from the operational deleverage that we had to -- or as a result of some volume shrinkage that we have seen in some geographies, namely China and Latin America. So as a result of this performance, so we are posting a gross profit at EUR 472 million, exactly in line, EUR 1 million short with the level of performance delivered in H1 of 2021. In relative terms, there is a dilution effect of 4 percentage points, which is triggered by a couple of elements. So you know that the sales growth, there is a component of it associated with the push of the inflation effect. Obviously, this push does happen, although it's pass-through of inflation impact that's happened without markup. So it doesn't generate a margin. And the second effect is related to a timing delay. So we are incurring the cost increases ahead of the timing where we're pushing these impacts in our enterprises to our customers. So moving further down the line, so overhead expenses. So we have a decrease in percentage by roughly 120 basis points at 7.3%. In absolute terms, we have a slight increase in the range of EUR 13 million. This is mainly related to some expenses associated with some IT projects, and also an outcounting reclassification from balance sheet to P&L has some expenses associated with some licenses needed to be considered as OpEx not CapEx. In the line, other operating revenue and expenses, EUR 19 million, there is the impact of the proceeds resulting from the sale of an idle asset, that's the land that we have in Doncaster in the U.K., which is amounting to EUR 11.5 million. Moving to the EBIT. So there as well when you look at the evolution, remarkable stability, given the context and the challenges that we have to deal with, EUR 283 million, with almost no impact, EUR 1 million coming from inventory valuation as the impact coming from the inventory valuation in 2022 was equivalent to the impact that we reported in 2021. So looking at the 3 main blocks that we have in the graph, you will see that we have a volume impact of EUR 32 million. So that's the impact of the [indiscernible] roughly 50,000 tonnes, 56,000 tonnes missing from [indiscernible] entirely in China. There's another 46,000 tonnes missing from Steel Wire Solutions across many regions. So this has triggered this volume-related drag, which is also translated partly in the conversion cash cost as it triggers a fixed cost under absorption to which we will need to add all the impacts coming from the inflation, and this is leading to the EUR 110 million degradation of the cash conversion cost. So the combination of these 2 gray boxes and drags, that's amounting EUR 142 million. That we're compensating for 90% of its value through the pricing and mix effort and the great performance delivered by the company in terms of mitigating some of the headwinds that we've been facing. So the other line, I have already touched on the overheads, small degradation related to IT on the line other, that's mainly related to the sale of assets. Now moving into the business unit performance, and I will start with RR. So RR is reporting a very solid sales growth of 12% versus H1 of last year. Despite the volume drop that I was referring to, which is exclusively coming from China, and we have been able to compensate all of this volume drop in terms of top line through a very good performance in terms of pricing and mix and passed on input cost prices increase to our customers. So this has allowed us to offset more than the gap, and we're still reporting a 6% organic growth on top line, which is complemented by an additional upside coming from the [indiscernible]. So again, negative impact coming from the demand situation in China, different, several reasons, actually explaining the situation. The first one is that country had to go through several rounds of COVId lockdowns since March 2022. We kind of started seeing a slowdown of the demand overall in China back in end of Q2 2021. At that time, we thought that it was a temporary and that the situation will improve. So as of the end of Q2, we still don't see this improve. However, we do see first sign of changes. We see that in July, whether this will be further crystallized, it's hard to say, but we do consider that inventories in the supply chain are progressively depleted. And hopefully, continuation of this inventory depletion will start generating the growth starting end of Q3. That's at least one of the outlooks that we have. Again, very hard to predict given the volatility of the environment. But looking at some of the indicators that we're following, that's our interpretation of the situation. On a more positive note, I think that it's important to state that all other regions where RR is present have performed quite strongly. And to name a few regions, EMEA and India are definitely performing very well. All our plants, with the exclusion of China, are operating at full capacity. So this is a very good [indiscernible]. So the EBIT performance. So you see a dilution versus H1 of 2021. This is primarily coming from China, and it is distorting the overall performance, and again, why the other geographies are performing at a very good level. So for the second half, we are expecting a modest recovery in China. It's an assumption that still needs to be tested. Other regions will continue to perform quite well. We do think that the stimuli program, which will be implemented in China will also be beneficial to the automotive and the consumer spending, and this will have an impact on the tire demand in China. Moving to Steel Wire Solutions. So a sales expansion of 26% as well on the back of a very strong price mix and raw material changes, which is accounting for 32% on top of ForEx movement of roughly 3.5%. It is compensating as well a drop of volume, which is roughly in the range of 9.4%, corresponding to the 46,000 -- 48,000 tonnes that I have referred to earlier. The volume decreases were in specific case of SWS across the board. So we saw a drop of volumes of 6% in the important market of Latin America and an equivalent of 8% drop in volumes in EMEA, 3% roughly in North America. And China, Southeast Asia, it's a very small market for Steel Wire Solutions, but the percentage was much higher. It was in the range of [ 13% ]. So from a segment perspective and application perspective, we continue to see a good momentum in the utilities and energy markets. So we are still banking on this improvement to continue for the balance of the year. However, some other type of applications like constructions and agriculture will be somehow struggling a little bit for the balance of the year. We do hope that stimuli program in the infrastructure in China will benefit our business in SWS. Overall, the situation is characterized by a drop of volumes. Moving to Specialty Business. So Specialty Business is reporting a very strong increase of the top line of 74%. Part of this increase is related to the reclassification of the business segment, [indiscernible] Specialty Business. So if we exclude this reclassification and you look at 4 other -- 3 other segments, that increases-ed 38%. So very strong level of performance. You see this performance as well translated in the EBIT percentage. All the segments have reported a very robust double-digit growth and a very strong level of profitability on the back of very solid mix and very strong pricing. So going and looking at the specific segment Specialty Business, and starting with leading products, very strong top line growth in the range of 51%, further compounded by, and that's important to mention, volume growth of 10%, and a very successful implementation of the actions associated with the mix and the pricing, which is also helped by a shift towards high-end fibers for specific construction applications. Fiber Technologies. There is very strong performance, top line growing by 26.5%. Very strong momentum in high-end filtration, and semiconductor, hydrogen applications, very successful execution of the price of the campaigns, the automotive-related applications are somehow a bit behind generating a small drag, mainly related to the issues with the overall supply chain in the sector. Combustion Technology, there is, well, very strong performance, an increase of 21% of the top line, successful execution of the price of campaigns as well, very good execution of some operational adjustment with the shift of production from the Netherlands to Romania, which is allowing us to be more cost efficient. Last but not least, hose and conveyor belt, there as well, record sales actually for the first 6 months, which is mainly delivered on the back of a very strong demand from OEM manufacturers. So the projections for the view for the foreseeable future is that at the moment, we do not see any specific reason why this trend should change. So we're still aiming at a very strong performance for the balance of the year. We do see immense growth prospects for Dramix steel fibers, fiber technologies continue capturing the momentum that we see in advanced hydrogen electrolysis. And for the combustion business, the shift towards more in friendly -- environmentally friendly burners will continue and robust to further capture some of the opportunities that have been in the market. Last but not least, BBRG. So the top line growth of 13.4%. There as well on the back of a very strong pricing realization, some positive coming as well from the FX movements, which are compensating the volume drop of roughly 11%. The order book for the business is, again, at record high level, primarily driven by the business momentum that we see in the U.S. We will be able to further crystallize this momentum with the capacity expansion that we are currently conducting for the U.S., while the situation in Europe is somehow on the low end, mainly resulting from the scale-back of our trading activities with Russia. Other region where the business is present is LatAm. And there, we continue to see it very strong. In Advanced Cords, the year-on-year growth was relatively modest, mainly impacted by the slowdown of the construction activity in China. So that's for our specific segments. Just to continue moving through some of the P&L KPIs. So we are reporting a result after tax of EUR 223 million. That's EUR 26 million increased versus last year. Main contributor is obviously the EBIT performance, but as well some intermediary lines like other financial income, which is [indiscernible] the proceeds generated through some of our financial instruments. We do see as well an improvement from income tax. We are reaching a record low level in terms of ETR, mainly resulting from the usage of some deferred tax assets. So a one-off, so to speak. This is not the performance that we repeat, the 20%. It's not a normalized ETR. We have already discussed our expectations in terms of normalized ETR, which is more in the range of 26% to 28%. But nevertheless, very good performance expected for [ 2020 ]. Last but not least, the share in the results of the joint ventures and associate slightly below 2021, but still a very strong EUR 29 million on the back of a very strong performance of our joint ventures in Brazil, which are reporting a significant increase of the top line, also increases of volume, so very good performance that we are expecting to see continuing for balance of the year. So that's for the P&L. Moving quickly to the balance sheet. So as you have noticed, our working -- average working capital on sales has increased to 15%. So clearly not at the level where we would like to see it, but it's something which is clearly driven by the environment where we are navigating. The key driver on the increase of the working capital is associated with the inventories, the accounts receivable. And as far as inventories is concerned, so there is 60% of the increase which is associated with the [indiscernible], higher value of our inventories, 40% is related to increases in tonnages, and there are 2 drivers. The first one is that we needed to rebuild our inventory levels after a very low opening balance sheet at the beginning of the year. We are not expecting this figure to stay as we are actively working on that to further optimize them. Some key figures for shares, and there the relevant figure, and Oswald has touched on that, is the very nice step-up that we are reporting for the EPS at EUR 4.16. So the result of all the good work and the improved results that we have been able to deliver during the first half of 2022. A quick recap on where we stand with the share buyback. So you all know that we had initiated the program back in 2022. The first 2 tranches of, respectively, EUR 30 million have been completed. The last one has been that has been completed on the 22nd of July. We have relaunched the last, the third tranche of the program today for another EUR 30 million, and we will be canceling incremental shares that will be acquired during the balance of 2022. Outlook. We are conscious that this outlook might create some frustration because there are no figures in it. But again, bear with us. I mean, given the current situation, we'll be needing a crystal ball if we want to provide more precise guidance. I think that the key message for us is that we are conscious that we will continue navigating in a complex environment. There are some clouds which are accumulating in the horizon. The situation might potentially become even more difficult in the next 6 months. However, we do think that we have proud demonstration that we know how we can manage these type of challenges. We are implementing contingency plans which will further accelerate some of the structural cost savings that we have. We didn't tackle all the hanging fruits that we have in the organization. So we will make sure that we tackle them in a structured way. The pricing discipline is there to stay. It's not something which is [ punctuous ]. We will continue to further leverage on that. And we will continue looking actively at our portfolio management. So that's how we see the situation. So the organic top line growth, that we have provided the guidance during the first half, I think that, again, because the environment is becoming even more volatile, it will be difficult at this stage to make a firm statement on that. All we want to say at this stage is that we will be actively working on it to make sure that we deliver on the guidance that we had initially provided at the end of Q2. And now, Katelijn, back to you.

Thank you. We'll now start the Q&A session with our covering analysts. [Operator Instructions] Emmanuel has already raised his hand. So please.

Emmanuel Carlier from Kempen. Two questions to start with, both on the guidance. So starting with the sales guidance. So after the Q1 trading update, you kind of indicated that organic sales growth would be around 18%. I think during the presentation, we have been pretty clear on how you expect the volumes to evolve. But could you be a little bit more specific about how you think about pricing. And so I think it would be helpful to hear how the wire rod pricing is evolving? So that's the first question, a bit more clarity on how you think about pricing in the second half?

Again, all statements we will make are working assumptions, which can evolve significantly along the way. So what we have seen in terms of wired pricing because it's driving the significant -- generating significant impact on the top line that last year, it has increased by more than 50% versus the position at the beginning of the year. And we saw a further increase of the wire rod prices by 20% during the first half of the year. That's the situation year-to-date. We do think that the situation will evolve because supply of wire rod is easing across many geographies, probably with the exception of China, where expected rebound generated by the stimuli program will probably create some tensions on the overall wire rod situation. So the assumption that we have taken so far is that the prices on a compound average rate will decrease. So the gain of 20% of the increase of 20% will be translated to the decrease of 20% for the balance of the year. So therefore, the cost inflation impact coming from material that we have reported for the first half will not be translated one to one. We will obviously now adjust our strategy. We have already done it in the past to hold on the current pricing level as much as possible. But just by the nature of the business, we know that there is a natural time lag of roughly 3 months between the moment we see the decreases on the prices at the moment it is translated to end customers. So that's, for the moment, the expectation that we are backing on.

Okay. That's clear. And maybe just one updated question on that. What is the spot wire rod price indicating today. Is that already showing some decreases? I guess it's depends on region, but...

Yes, it is very much -- well, it's depending from the region, and it's depending from the wire rod grade that we're seeing. So with the exception of China, the indication is that it's slightly decreasing. So not massive, but there is an increase which is already noticeable in a plus in July. Plus you want to say something about...

Absolutely. But I think it's not only wire rod what which we are watching also the other ones on energy, utilities, we are looking at this one. And as Taoufiq was saying, it depends a little bit on the regions. In China, we see more of the flattish one and say in other areas. But it's really about also what is the stock, what is the inventories, there's having demand coming back, maybe we see this also in China. It's still a little bit of a crystal ball, what we need there. But I think the overall trend comes into the softer.

But is it fair to say that you kind of in your mind saying that pricing could go down 20%. But as of today, you only saw a limited decline so far.

You mean the wire rod prices?

Yes.

Yes. Yes.

And if it happens, it will be gradually. It will not come one shot. It will happen gradually over the next 6 months or 5 months until the year end.

You know that we have, for example, in a rough reinforcement, we have contracts, which are also based on some indexes and this index is over shift up, but also the downs in this way. So this is exactly what Taoufiq is referring to. There's always a time delay of shifts in this matter.

Yes, that's clear. And then my second question is on the guidance on costs. So in the guidance statements, you literally mentioned that you're looking at the additional structural cost savings. So could you elaborate a little bit on that? What do you mean with it? And what kind of savings could it result in?

There are different type of cost structure and cost savings that we are aiming to tackle. So first one is that, I mean, if the volume continue decreasing, we will need to make sure that we absorb a more efficient way our fixed cost. So this will maybe rely on some self-help measures that we have already executed on in 2020 during the COVID prices. We will duplicate some of these measures. We will also look at cost savings that are associated with our supply. So we will be make sure that our wire rod is acquired at the best possible price, probably optimizing the mix of grades of steel that we will be acquiring. The back offices in the company are also going through a phase where we are optimizing them further leveraging on over shared services in cost basis. And the third leg will be to look actively at our footprint to make sure that it's completely. So obviously for this last one, it's not something where we can tell you where and when. All I can say is that it's something that where we will have a higher sense of urgency depending on how the volumes will be evolving, but we are not ruling out the possibility to take actions when it comes to specific aspect.

Okay. And is there any quantification you could give us? I know it's a bulk of many different elements, but I guess you have in your mind the kind of number you would like to lower the cost base with?

Yes, we have in our mind something, but I think it's still premature to tell you what the figure is.

I would now give the floor to Wim Hoste to raise his questions. Wim?

Good afternoon. Thanks for the opportunity to ask questions. I have a couple ones. Maybe first on Building Products. Can you maybe elaborate a bit more in detail about your take on the outlook for that globally? And certainly, also with regards to China, there's a lot of, I think, volatility in the Chinese construction market, some large developers, getting into trouble. And so I was wondering on your view on the outlook for building products globally and certainly also in China. That's the first question. Then second question would be looking back 1 year ago, you had a strong first half in Steel Wire Solutions, partly because you gained contracts because some of your competitors were not able to supply as fluently as before. So are you now holding on to these contracts? Have you gained and locked in the share of wallet you won last year? Or was there kind of reversal of that trend? That is the second question. And then I would like to ask one third question is on your balance sheet is still very strong even if working capital was a bit up and -- but your take on, yes, the use of that balance sheet strength going forward? Is M&A still on the agenda? Is it more bolt-on? How are you looking at the progress with regards to the share buybacks, any thoughts on all of that? That would also be helpful.

I'll take the first one, as Taoufiq was explaining billing products is one -- even it's not the vitality of our business, but they will highlight. When I look at this when we see, we have a plus 17% in entire organic operate increase there. It was where we also fixed in a much better weighted pricing. We have been looking on the demand and supply. But when you come to this, a lot of this is in Europe. I think this is a business where we really think also to come out of Europe to look further what we can do in U.S. because in U.S., I think even some there's different opinions if there's a recession, the finance minister, she said this morning, it's not a recession, it's very difficult. But I think U.S. is there, we are looking at this one, but of course, Europe was one we had to fix and also to pass on the cost. And India, it's a minor exposure, but it also goes very well. And China is not the impact because the -- I would say, the exposure we have is relatively. But overall, I think we can say in the first half of the year and also starting even in the last months of last year, KPIs has done a great job in progressing in their products. And for me, I mentioned several times, is really the way where we can say, sustainability is a business opportunity, because it gets really more and more in the mind of our markets, of our customers to reduce the CO2 negative impact you have out of cement and the less you use, the better it is. And here one example I just mentioned with the Slab, what we have to elevate this. That is sort of shows there's an increase in awareness. Let's just take off at over. Is it a slight which not -- but it's constantly growing. We have done the basis. We have done the pricing, we have look, and I think there were some I would say, special buy in the first half of the year. We have been also the inventories were to low with our customer. So a little bit of, I would say, strong cases coming that was people replenishing their inventory, because when you take an overall ban, I would say, Europe strong, America, we want to increase our footprint. India, I think we get, I would say, quite some good feedback. India is anyway a country who would like to focus much more on because there's a slower growth but the constant growth. When you look there, like also in rubber reinforcement, with the radialization what's going on, I think it's a promising month. It takes maybe a little bit of time since coming back to China, it's a big exposure.

And just to complement this one, if you know me as well. I think that when it comes to BPR, I think that what we're seeing, especially when it comes to Dramix steel fiber, it's really a structural trap, beacuse one of the key hurdles that we had to deal with in to some extent, still need to manage in the short-term future is the adoption. You know that construction is a very conservative environment, so they want proven solutions. And when you come with starting very innovative as using steel fibers in construction, it's really driving some challenges in terms of adoption. However, we do think that increasing pressures in terms of CO2 emissions, the inflation that you have in the labor in the construction sector will accelerate the adoption and thinking about alternative solutions. Because the Dramix helps in terms of CO2 emissions decarbonization, but it has also the benefit of reducing the labor which is needed when it comes to the specific applications and the level and the quantity of cement, which is needed. So I think that there are some very strong value-based proposition associated with the product and the application, which in the current context, can only be used as a further leverage to sustain the growth that we are seeing so far.

Just to file the complement. I think it's also about the scarcity of the labor, but we have to be also very honest and transparent the construction is a very conservative one. With the regulation norms and the go to market where we're really focusing on is the most crucial. Because the prerequisites, the environment is the structural adoption is there, that how to go to market, how to make it into the norms. I think this is what we are working on. And the second one is on SWS. Yes, SWS last year was an amazing year. And it's in human life not every year, we can have an amazing year. Yes, the overall volumes went down. You mentioned about the contract. I think the volumes went down. But I think is we don't have a change of the share that we have. But the overall volumes went down, so it also went down for us. You have a lot, I would say, of political topics that you had a lot of elections there and people who are waiting what happens one left on my right, what does this mean for interest for taxes, et cetera, in this way. But I think we still have a very solid mission -- we have a very successful merger there, I would say, an acquisition we did with Almasa, but it's, of course, on a smaller scale. But you are right, indeed, in comparison to '21, I think, yes, it's absolutely softening less volume, but it's not the loss of the market share. The market went small. But when you look on the years '20 and '19 backwards, I think it's still on a reasonable very quick -- Because we also talked about the logistics what's coming from house. This hasn't changed yet. When you look back a couple of weeks with all the lockdowns just of Shanghai, and I'm sure you have seen the pictures of the ships fueling out. This has not the demand is low. And there's also the uncertainty out of different elections. You have just heard about the unrest couple of weeks ago in Ecuador, et cetera. And this is, of course, influencing as well in this industry. I think there was something on the balance sheet front. So the third question is on the balance sheet. So in the current context, for us, the name of the game is about balance sheet conservatism. So we will not do in considerate things in the current context. We need to gain more visibility before being more open to some of our balance sheet positions. So having said that, we don't want to compromise our future growth. I think that there are obviously proven areas where we need to grow. Where we need to continue investing touch on some of them. So we might have tactical bolt-on transactions associated with that, can be M&A, can be partnerships. We are not ruling this out. So we will probably approach it from a very opportunistic standpoint because we do think as well that when it came to our M&A plans that we have discussed several times. The current context actually can be present also an opportunity, I had to drive some of the multiples that we were looking at initially to a much reasonable and acceptable level, and it will be probably the right time to look at them. So we want to be very opportunistic. We want to be conservative with the way we're managing our balance sheet context is somehow forcing us to be conservative as far as the [ SPB ] program. So when we launched it, we stated that, we are not ruling out the possibility of doing additional [ SBBs ]. The environment doesn't allow us to make obvious and clear statements on that. If the situation evolves, we will obviously come and tell you how much and by when. For the moment, I mean we want to remain prudent for the time being.

Frank Claassen, you are next.

Frank Claassen Degroof Petercam. Three questions, please. First of all, on the working capital, you've indicated that you're yes, let's say, not happy or not fully satisfied with the current inventory levels 15% of revenues, working capital, what would be a level going forward? Can we go back to the 13%? Or what is your vision on the working capital? Then secondly, on the energy crisis in Europe, high gas prices, high electricity prices. How much exposure do you have there? And have you seen most of the impact? Or is there still more to come for you maybe some hedging is there in place? Some words on that, please? And then finally, on China, let's say, how did the competition behave so far in a tough environment? And do you think you can move back to double-digit margins if the market indeed recovers?

Okay. So starting with the working capital. I mean, as I tried to explain, there are a couple of reasons which are leading to the current situation, obviously, in a context where the wire rods are increasing at the level where they are -- it triggers an increase of your inventories. Currently, if we look at the base of inventory, we normally operate around 60 days of inventories. The 60 days have increased to 90 days by the end of June 2022. So a quite sizable increase, this is something that we have somehow a load because we were dealing with an environment where the price of the wire rods were increasing on a constant basis. So we wanted to make sure that we capture the wire rods at the best price possible. And that's why we have related some safety stocks, and we have also rebuild inventories, which were significantly at the end of Q4 2021. So it's something that managing inventories is something that we have done on a regular basis since 2018, 2019. So we know how to manage it. I think our objective is to bring them back at 60 days by the end of the year. So we're very bullish about it. And this is how we will be managing it. So Oswald and myself, we're looking at battery levels -- by plant on a -- by weekly basis almost. So starting, which is clearly on top of our agenda. Again, it has increased as a percentage, working capital that 15% is not for traders. I mean that's a normalized level where we were a couple of years ago. So again, coming back to 14%, 13%, I mean, it's a task. It's not a change. So on the energy crisis and the hedging. So the approach is very much differentiated by region. So in China, we turn on to hedging. It's a fixed price. In the U.S. also, there is no hedging possible except for gas. In Europe, we do some hedging, but we do prefer having hedging through the sales contract and index is embedded into the sales contracts. Having said that, we have done some hedges. So for 2022 as far as Europe is concerned, we have an average of 90% hedges. We are in the money versus delivery charges, we have started at the right timing doing these hedges. We have started in September 2021, which puts us in a situation where we consider that Europe is properly hedged. Now we're working on 2023, so we are reaching a level where 50% of our expected acquisitions are hedged. We continue to further increase this percentage. But this is where we are. But as on top of the hedges that we're doing, I think, for us, what is really important is to make sure that we have a natural hedging, so to speak, through our sales contracts.

Can I ask a follow-up on that because does that mean that part of the, let's say, higher electricity prices could still come next year because hedges roll off or are hedged at a higher level? Or is that not the line of thinking?

Well, I mean some of the electricity -- I mean the hedges are not covering 100% of the increases that we have. So we have already started having some of this impact versus our hedges. But as I said, we are not going to be dramatically impacted next year because -- and that's the reason why we prefer to have hedging to our contracts and to index throughout contracts. Because it allows us to translate the real increase that we see in our markets to our end customers. So the hedging is the complement a tactical tool instrument, but we focus more on translating the prices in our the increases in our end prices.

On this one, Frank, we take huge efforts from the sustainability point of view to reduce the energy intent. We run currently and not currently over the last months projects. How we can take out double-digit percentage consumption of energy. And this we did start before anybody was thinking about the energy prices. So it's four really. One is the commercial effect, how we can pass it on. The other effects of how can we reduce less, we have a solar just a solar we did in -- we are about to early '23 in [indiscernible], we have in India, some there's a lot of activities going on. We built a lot of intelligence in our machines to steer much better the energy consumption. We are really digitizing, of course, we start always with the biggest plants first [indiscernible] and to really say how can we in the process flow optimized our energy consumption. So it's a little bit twofold, yes. And this works very well together in this environment, you might imagine. I think that the last one was in China, China, especially when you look forward, we had many video conferences with our colleagues for the 3 months, let's say, roughly of the shutdown. I think it demanded a lot from our people there, yes. And currently, we can say there is a lease, I learned that maybe China has seen this tough lockdown in Shanghai maybe not as the best solution. This is what we also see. Our plants are currently funding. And we had disclosed to production where people have been sleeping and working and eating [indiscernible] all over. The demand that this is also very clear has reduced. In This environment, you will not see a prospering development of the situation. But now we think -- I think we have somehow bottomed out because what was produced was out of existing inventories of existing, I would say, there is a need of to replenish it, when does it starts up, will it go up to the original [indiscernible] I think what in our plan is that there's a kind of modest recovery from this very, very, very long. The second thing is what we need to understand in China. When you look back in the last 25 years, China was all about cough, cough, cough. This was somehow the mathematics of China, how it was developed. And this comes to an end. And we see that [indiscernible] our competitors, they have announced they one [indiscernible] like it did lasted 25 years. This is one topic. But when you look on their financial results, they have published the offered they're suffering a lot. And some of them have given an important warning. Some of them are mentioning losses. So I think there will be a rethinking of really new capacity will be necessary because you will not get the value. You aim for before this intensive CapEx and -- intensive capital business. The first one is, we have a main chart of truck tire business, in our entire business. You can say 80%, 85% of our exposure in China is up for reinforcement. And this is stimuli -- stimulus package we see now coming up, I would say, this is one of the levers infrastructure it's always the first one to come. It will not be at the hate, I would say what we have on experience, but I think we are bottoming up. The good thing is for RR that we have areas like, I think I mentioned in India, where we are really exploring and see. There seeds are coming in the right way, of course, not on the very short term and that we in Europe are still a very solid and strong demand. So the balance is true. And of course, our aim is to come to those heights, which we have always been aiming for. We cannot escape the environment, but all what Taoufiq has nicely described is what we can do with self-help measures. This is why we are taking in, other things which are not under control, it's always difficult to see or the forecast.

And now I invite Stijn Demeester to raise his questions.

A couple of follow-ups. Three, if I may. The first one is again -- I'm sorry, on the outlook. We are now one month in Q3. How many months of visibility do you have on second half trading? And what for you are the main areas of uncertainty if you look at the second half. Yes, let's start with this one.

So we have an average of 3 months outlook on the performance of our business. I mean, there's a significant portion of our business, which is LTSA base. So this gives us a good indication, especially in our part of where adding. Overall, what we do see currently is our order book are quite strong. We are growing in many areas, specifically the low-carbon concrete reinforcement businesses, for instance. We mentioned hydrogen. We mentioned offshore wind markets. So we are expanding our positions as we have been [indiscernible]. So I mean, there are several indicators where we do think that provides a reasonable visibility on how the things might be trending. The big question mark is a little bit as we shaped with the pricing elasticity discussion with the prospect of the demand in places like China and Europe with the prospect of a recession. So the combination of these things are all risks, which can fill some of the visibility that we have. So that's why -- I mean, again, in a normalized environment, I would have told you, okay, it's 3 months. It's this amount. This is the percentage that we're expecting. It's just difficult currently with the volatility we're seeing to be able to commit more firmly on any specific figure.

And can you comment on Q3, or is it mostly the fourth quarter that is sort of worrying you? Not that I want you to, Not that I want you to comment something on Q3, but is that sort of the visibility you have today?

Well, I mean, the plan that we have is -- I mean, we do forecast for the fourth full year, and then it's a 6-month forecast. It's something that we review on a monthly basis. To second half of the year is a kind of peculiar period because, I mean, you have less working days, you have summer rates, you have shorter months in December, you have seasonality impact on some specific applications like constructions or during the winter. But I mean, to answer simply your question, yes, we know what Q3 will look like. Am I going to tell you how much has that EBIT we going to deliver in Q3? The answer is no.

Understood. Understood. Second question is on what I assume still stands in your outlook is the profitability bracket of 9% to 11%. Would you also expect it to reach on a half year basis? Or is it, Yes, more concretely, do you think that the margin in the second half will be in that bracket.

Well, I mean, to answer this question, you can just look at the patterns that we have from the past. So you always see that the first half has a tendency to be stronger than the second half, with the exception probably of 2020 and 2025 in the correct second half which were a bit peculiar because we were in pandemic. But the expectation is that second half will be globally profitability compared to the first half. So I mean, we committed or we guided in the 9% to 11% for the moment, we don't want to change this guidance. We're sticking to the wording we have already communicated in Q2. But there is clearly a pattern for the second half of the year with the seasonality effect and also the whole activity, which is becoming higher than what we do think we have gone through the first half of the year.

Okay. Understood. And the last one is on FIFO, your most loved subject. When you say that your assessment today is for a wire rod price to decline by 20%, what would be the associated FIFO impact in the second half. Can you give some building block here? Is it the full reversal of the last year's. I guess it was in absolute terms in EUR 40-ish million? yes, how should we look at FIFO for the second half? Because that's quite a big impact in -- when we talk about margins. That's obviously a big force here.

Full part, we're expecting a reversal of the first half impact that we have seen. So a decrease, therefore, the negative for H2, which will be probably a bit below the upside that we got in H1. But again, I don't know if I have to admit it, but we kind of got it wrong when we started projecting [ 5% ] action. Because the prices went completely off track compared to our initial assumptions. But now our working assumption is a conservative one. And we do think that prices will decrease and did we raise most of the gains that we have seen during the first half. We have already started seeing a decrease and a negative 5% for the first time in the year in the month of June. So although it was very small you still had a decrease in the negative [ 5% ].

Okay. A follow-up here, if I may. If wire rod prices would revert to the historical mean, what would be the cumulative impact.

Historically, what's your baseline? Because I mean, as I said, I mean, in 2021, we had a 50% increase of the wire rod's first half of 2022 20% versus the position of [indiscernible]. So on a 18-month period, there's a 70% increase of the wire rod prices. So assuming that all the 70% increase will be raised in the next coming year. We do think it's clearly not possible.

No, no, no, sure but...

But there will be some balancing. The demand will probably ease. But again, it's still very difficult to assess whether the stimuli programs and potential that it will generate on the steel demand, we trigger massive an evolution in one direction or the others. So I mean, it's again very difficult to answer your question. I don't know. But if you have a more accurate.

No way, I think wire rod is only, anyway, special products. I think we have to look on sales. We have to look on profitability, how much is pricing, how much is in the inventory, but when is the impact -- it's going to, I think, a very -- it is more on the prices. And of course, [indiscernible] what we are -- we say this would be easing, it would be going back, we'll have to hold on the prices. This is the biggest challenge we have in front of us with a lower demand to keep on the prices. So this is where a little bit of cautiousness has to come in for reality reasons. And this is what we are working to make sure that we don't give something away that we don't have, and this is also the inventory at the price levels we can then have also to the sales to the customers properly reflect the challenge we see, and this is very -- it's very different from region to regions as well. How this is in Europe and a bit easier. I think India is also okay. China hopefully goes up a little upwards, but of course, let them -- we will not come back to...

I'm saying just on the mechanics of the FIFO and the way it impacts our profitability. So normally, one would expect that a decreasing wire rod price should also improve our cost of sales and our margin provided we hold on the prices as Oswald has said. There are really a couple of factors that need to be modern if you want to have some kind of assessment. The first one is how fast the prices will go down, up to which level and the second and very important assumption is how long we can hold on the existing prices to sustain the top line. And as I mentioned, there is a timing delay between the moment where the price offered or downward is happening at the moment, it is reflected in the price, and that's an average of 3 months.

Emmanuel, you want to raise an additional question?

Yes. Thank you. I have one question on hydrogen. So you have been quite upbeat on that segment. Could you maybe update us on the progress you have booked in the first half of 2022? And also give us a little bit of your financial aspirations for this segment?

Taoufiq, you want to start?

Well, I mean, hydrogen as you know, it's, first of all, associated with a technology that we started hoping some years ago. So now it's really picking up. So we were in the single-digit type of top line and what we see is that the sales have quadrupled in 2022 from the mid-single digit last year. And we do see a kind of exponential growth when it comes specific segment and applications. So we have fairly clear ambition to grow in this sector in line with the demand. The key challenge is to manage the scale-up phase. As you know, the big challenge when it comes to hydrogen is to increase the capacity as fast as possible in order to bring the price to a reasonable level. And that's why, I mean, there are very bullish prospects when it comes to hydrogen. So this is obviously delivering a discussion around the investment associated with this market. What we see currently is that the forecast and the projections and the demands coming from the clients with whom we have LTSAs are changing upward on a regular basis. So it's really booming very fast. So it's going upwards on almost a constant basis. And yes, this is where we are.

Okay. And if you look maybe a few years out, so let's say that you generate around EUR 20 million in sales in 2022. Yes, Could you move towards EUR 200 million, for example, by 2025 because this is quite important to the profitability as well?

Yes, it is. I mean looking at the level of margins, it is very important. So now our scenario is that we should move in the range of EUR 100 million by 2025. And from there, there's an exponential growth, which is inspected.

Maybe Emmanuel just to complement on this one. I think the demand situation will accelerate and we get, say, periodically a higher demand forecast. It's really -- put on the right technology as well. There are mainly 2 technologies there investigating in which we can have a significant play. And I think we are on the right track. This is a little bit of a brief phase on what you've seen in all, everybody is partnering with somebody, we do because everybody is convinced that this has in 3, 4 years, a significant takeoff in this area. There is more than a [ bet ]. Hydrogen is all about -- there's one technology, which can not reduces renewable energy and technology we are looking at is they can take green energy, and I think this is also very big differentiators. The key topic is how fast the cost can go down. And this is always compares for fossils. And you look [indiscernible] and with the current, I would say, gas prices or whatever is hydrogen gets more -- let's get sooner attractive. And I think this is also something we maybe say can we go faster than before. Hydrogen, we have also in the BCT and Taoufiq was mentioning we call it environmentally friendly burners, which where 20% of our products can already use today hydrogen, and we think that also in the industrial burners hydrogen might come earlier than originally forecast.

And just to further complement some of the figures I have given to you Emmanuel, I mean, this is really organic growth, and we are not ruling out partnerships, M&As, when it comes to hydrogen to help us further capitalize on the prospects of the market.

Okay. And if you would be thinking about partnerships or M&A, would that be a broadening of the solution you have? Because I think if I understood it right in the past, you mentioned that you were one of the sole suppliers in the electrolysis?

It depends a little bit on the technology you are in today, deliver out of our sales, at least our fine fiber business, we deliver this membrane. Membrane is coated and then you have the capital. And I think what we are currently in, we can do maybe coking by ourselves, we can do more and more how can we really integrated, what is the field of play we could -- we could offer here in this market, not only the membrane. And I think it's just a logical way. What we always say in the adjacent areas go in because it really confirms that this is what we hear from our customers, the technology we have here, the capability, and this is maybe once we did not touch yet. We have a lot of different [indiscernible] buildings going on in the way we move forward with the [indiscernible] and hydrogen is one of the area where we have an absolute small capability that we have. Especially because the markets will come.

With this gentlemen, thank you, ladies and gentlemen, thank you for participating to the analysts. Thank you for the awesome questions. Thank you for your continued interest, everybody. We look forward to meeting you again in the near future.

Thank you for joining. Have a good weekend and for the ones who can be in vacation, have a good vacation. Thank you all.

Thank you very much.