NV Bekaert SA (BEKSF) CEO Oswald Schmid on Q2 2022 Results - Earnings Call Transcript | Seeking Alpha

2022-08-08 11:07:32 By : Ms. Lucky Zhang

NV Bekaert SA (OTCPK:BEKSF) Q2 2022 Earnings Conference Call July 29, 2022 8:00 AM ET

Katelijn Bohez – Vice President-Sustainable Finance and External Relations

Oswald Schmid – Chief Executive Officer

Taoufiq Boussaid – Chief Financial Officer

Stijn Demeester – ING Financial Markets

Good afternoon and good morning to all analysts, shareholders, investors and other participants on this call. Please be informed that meeting will be recorded and published for replay on website after this meeting.

I refer to our Safe Harbor statement, which applies to the presentation that we use today, as well as to the statements made by the speakers.

Oswald Schmid, CEO; and Taoufiq Boussaid, CFO will guide us through the news that we are sharing today, including our business context and priorities, the results for the first half of 2022 and our outlook and ambitions. I now give it forward to Oswald Schmid, CEO.

Thank you, Katelijn. Good afternoon, or good morning. Hello everyone. Everyone welcome on behalf of Taoufiq and myself. We're happy to share with you the results of the first half of 2022. We'll also give some insights on how we perceive the ongoing macro-economic developments and further, we will give an update how we are moving bigger to the next level in the strategic transformation.

But first of all, let's have a look on the financial robustness of Bekaert, give some figures of the first half of the year.

Overall, we have delivered robust sales growth, you see plus 24% in an environment, which of course was also guided by lower volumes, by inflation, but we have a very strong pace. The underlying EBIT was about the same as the same year of last year and you have heard in March and all the first half year of 2021 was an exceptional one. We are here on the same base as we have last year.

ROCE continued to exceed 20% and the Net debt leverage remained well below one with effect of 0.88. These results and the financials are always an outcome of the results, but we do reflect the focus of our actions that we have made us more resilient to the economically cyclicality. And those actions were to continue their strong price realization to further work on the excellent operation performance, leveraging the benefits from our global footprint, and local services and sourcing channels for our customer and further this of course, this might be a small part capturing already short- to medium-term growth opportunities of sustainability and innovation trends. And I will come back on this moment a little bit later.

Looking at the financial parameters and here you see, we have compared the last with us 7%, we achieved strong and constant sales growth up to 24%. The underlying EBITDA and EBIT in un-compared with the year-on-year what we have shown in an exception year in absolute amounts, of course, from 2021 to 2022. The net debt leverage below factor of one. And there is a robust scope in the net results with an EPS earning per share increasing by 40% to €4.16.

And of course, Taoufiq will go a little bit more in the details of this financials, but I would like to see 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 and we experience it every day. Very high inflationary 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 off top of the shortage of materials, its labor and logistic issues.

We have seen 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 long closed loop production in the factories living and working. There is the war more than five months between 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 carbonization then they continue and this is a benefit for Bekaert because being present on the global scale, we can – we can further utilize the set up to serve our customer better.

The energy transition accelerates towards renewable energy sources, such as wind and hydrogen, but moreover, there is a strong trend to energy independence becomes crucial, particularly when it concerns, for example, Russian gas for Europe, and this will trigger even more investments in some special tactics.

In addition to that sustainability trends and decarbonization will benefit other markets and investments as well, such as low carbon constructions. And we all see the electric vehicles trends is a growing market with good opportunities for offering our products in this area.

Stimulus programs in U.S. many utilities and as recently announced in China, €220 billion mainly in infrastructure and automotive, they will support and should push the economic activities and hence demand in these areas.

So now how do we deal with all these headwinds and tailwinds while we remain focused on our value creation chain? And how do we continue to perform, transform and grow 1.0 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 approach. Value creation this means for customers, make them successful for people who attract them to work for us, the society, and of course, for the return of value to shareholders.

We see this value creation already benefiting for 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 crisis, with this relative lever global leadership in the areas where in have local presence and to return value to shareholders by increasing their dividend. And if you are aware of this 50% that the continued share buyback, which we are probably proceeding.

This was the perform, transform, growth as we call in 1.0, meaning perform strong execution and focus in key performing metrics can be on P&L basis, it can be balanced, this can be how we deal with customers. Transform was about setting up innovation, digital sustainability is a key lever for growth. Growth was about putting the seeds of growth, building positions in hydrogen, low carbon component with offshore, wind and energy and accessories. And now we are taking it to the next level of perform, transform, growth. And we call it 2.0 with the kind of dual track.

The first one is strengthen the core, where we are in for a long time, which of course is the absolutely the main part. But there is 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, which are the areas of business, where we get the value, where we can offer the value proposition of the customer. In the transform area it's about creating smart, sustainable, safe solution by expanding our digital beyond steel, alternative materials and services for offering the key markets.

Growing means, its leadership in target markets, which we see as a future office ports. So there is the Bekaert core we want to strengthen. And then we seed the first seeds, I would say, we got the first seeds in the Bekaert beyond.

The strategy focus, this is our core and beyond approach, this really aims to future growth of our balance portfolio. Our objective is for the safety for value creation for all stakeholders. Strength and optimize the core business where we are in, we have in many areas, we are absolutely the trusted and preferred supply of steel wire applications. And as mentioned many times with the global footprint we have customized business. But we want to grow for more being a leading solution supply in selected markets.

Allow me to just give you three examples. The first one is enabling the energy transition for renewable electricity, power infrastructure and hydrogen production. Another example is supporting, helping to decarbonize construction and facilitating urbanization with a green and high-performance solutions in the areas of concrete CO2 reductions. And of course, the electric vehicles, as also mentioned before, they offer as well offering we can give to the customer. And this of course translated in the half year focus areas we are in 2022, leveraging the global footprint again pricing discipline passing 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 give us the return we are aiming for continuing the operational excellence and customer intimacy. And then of the second part is to look where we can add in the area of low-carbon concrete reinforcement solutions where we can contribute to de-carbonization, 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 are expanding our position in energy and utility markets in the U.S. You can see a chance to go further in 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 of two, three ones. And here you can see on top of the metro, we are implementing the first Sigmaslab elevated construction programs with our partner, CCL in Norway and Germany. This is a low carbon concrete for elevated steps with Bekaert metal fibers [ph] and it has two ways. The first one it's much easier to install, it reduces the TCO, it reduces [indiscernible].

On the right side last week and I think we are very proud of that. We concluded the first synthetic ropes 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 turbines. And in the middle, it's not a project win, but it's a very prestigious award win. In May Bekaert won the Tire Manufacturing Innovation of the Year Award at the TireTech, Hannover, but they did with no tire. Well, this is a, I would say very recognized award here, and it's about COVID free [indiscernible]. Post-COVID obviously is not one of the materials you want to use in future, and this would allow tire makers to make their products entirely carbon free.

So altogether exciting projects that illustrate where the world is moving to smart, sustainable, and safe solution, but also an illustration of Baker's contribution and presence to exciting projects over the world.

Here last but not least, a small update of our global presence. You see that the world is quite covered with the products you see, our manufacturing places, office station, city centers, engineering centers. And when we look on the first half year, how was the geographic allocation? 39% was EMEA and when you take North America and South America together it’s about 36% and followed by Asia-Pacific area with 25%. From the consolidated sales by industry, of course, in the automotive we are up by 40%, but many other applications like wipers or window regulators, that's all together, it's the very stronger and construction is coming up more and more. And I think energy and utilities will be for surely one which we see much more growing with respect to the allocations.

So now, I think it's time to have Taoufiq to look into the figures and I’m handing the floor to you.

Thank you very much as Oswald. Good afternoon, everyone. Again, my pleasure to have this opportunity to take you through some of our key financial highlights for first half of 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 the inflation continued to increase. The post-pandemic situation combined with the war in Ukraine has made the overall 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 for most of the comparisons that we will be using in discussion, we are 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 these 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 units’ performance. So our consolidated sales have grew almost 25%. So a significant expansion of the top line. Our consolidated sales standing at €3.5 billion almost. So there is well significant boost for the last six months. And with these volumes we are hitting new milestones and another record.

So this performance is allowing us to deliver almost €0.5 billion incremental sales compared to the same period of last year. So very strong set of results, which have been crystallized by our continuous focus on better segmentation, product portfolio innovation and as well reduced presence in lower margin applications, while our active pricing management has allowed us to mitigate the impact from the inflationary related effects that we have seen so far.

So we have approached our markets from a very – with 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 cost in a quite successful way.

So as I said, I will elaborate later on, on the specific views I will jump directly into some of the P&L metrics. And I will comment first on the cost of sales. As you can see our cost of 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 ranching from labor down to raw material, utilities, transportation, and obviously energy. However, as I have explained it we have been working hard on the price, and the mix and this has allowed us to absorb significant if not all of the impact that we have been suffering from these increases.

So not only the increases from the inflation, but we have also compensated from the operational and deleverage that we had to owe as a result of some volume shrinkages that we have seen in some specific geographies mainly China and Latin America.

So as a result of this performance, so we are posting a gross profit at €472 million, exactly in line, €1 million short with the level of performance delivered in H1 of 2021. In relative terms there is a dilution effect of four percentage points which is triggered by a couple of elements. So, that the sales road, there is a component of it associated with the push of the inflation effect. Obviously this push does happen, although this pass-through of inflation effect does happen without markups. So it doesn't generate the margin.

And the second effect is related to a timing delay. So we are incurring the cost increases ahead of the timing where we are pushing these impacts in our end prices to our customers.

So moving further down the lines, so overhead expenses. So we have a decrease percentage by roughly 120 basis points at 7.3%. In absolute terms, we have slight increase in the range of €13 million. This is mainly related to some expenses associated with some IT projects and also outcounting reclassification from balance sheet to P&L as some expenses associated with some licenses needed to be considered as OpEx not CapEx.

In the line order, operating revenue and expenses, €19 million there is the impact of the proceeds resulting from the sale of an idle asset that's land that we have in Doncaster in the UK which is amounting to €11.5 million.

Moving to the, EBIT. So there is one when you look at the evolution remarkable stability, given the context and the challenges that we have to deal with €283 million with almost not impact €1 million coming from inventory evaluation. As the impact coming from the inventory evaluation in 2022 was equivalent to the impact that we reported in 2021.

So looking at the three main blocks that we have in the graph, we see that we have a volume impact of €32 million, so that's the impact of the operation, which resulting from the volume shrinkage, so there is roughly a 50,000 tons – 56,000 tons missing from RR entirely in China. There's another 46,000 tons 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 €110 million degradation of the cash conversion cost. So the combination of these two gray boxes and drags that amounting to €142 million, that we are 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 lines I have already touched on the GAG overhead, small degradation related to ISIT on the line order that's mainly related to the set of asset that I have referred.

Now moving into the business units 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 is exclusively coming from China. And we had been able to compensate all of this volume drop in terms of top line through the very good performance in terms of pricing and mix and passed on input cost prices increases to our customers. So this has allowed us to offset more than the gap and we're still reporting a 6% organic growth on the top line, which is complemented by an addition upside coming from the ethics movement. So again negative impact coming from the demand situation in China, different – several reasons actually explaining this situation. The first one is that country had to go through a several rounds of COVID lockdowns since March 2020. We kind of started seeing a slowdown of the demand overall in China, back in the end of Q2 2021. At that time, we thought that it was a temporary, and that the situation will improve. So as of end of Q2 we still don't see this improve.

However we do see first sign of changes. We do see them 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 the continuation of this inventories depletion will start generating a growth starting end of Q3, that's at least one of the outlooks that we have again, it's very hard to predict given the volatility of the environment. But looking at some of the indicators that we are following that's our interpretation of the situation.

On a more positive note I think that it's important to state that all the other regions are – 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 indicator for us. 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 BU performance, and again while 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. The other regions will continue to perform quite well. We do think that the stimuli programs which will be implemented in China will also be beneficial to the automotive and the consumer spending and this will have a knock on impact on the entire demand in China.

Moving to Steel Wire Solutions; so sales expansion of 26% as well on the back of a very strong price mix and overall material changes, which is accounting for 32% on top of a 4x movement of roughly 3.5%. This is compensating as well a drop of volume which is roughly in the range of 9.4%, which is corresponding to the 46,000, 48,000 tons that I have referred to earlier. The volume decreases where in specific pace 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 Solution, but the percentage was much higher. It was in the range of 30%. So from a segment perspective and application perspective, we continue to see a good momentum in the utilities and the energy markets. So we are still backing 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 the stimuli program in the infrastructure in China will benefit our business in SWS. Overall the situation is characterized by a drop of volume as we speak.

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 a business segment, the whole conveyor belt from RR to specialty business. So if we exclude this reclassification and you look at the four other – three other segments that increases 38%, so very strong level of performance. You see this performance as well, translated in the EBIT percentage. All the segments have reported 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 into a bit more detail and looking at the specific segment within specialty business and starting with building products, very strong top line growth in the range of 51% further compounded by and that's important to mention a volume growth by 10% and a very successful implementation of the actions associated with the mix and the pricing which is also helped by shift towards high end fibers for specific construction applications.

Fiber technologies, there is one very strong performance top line growing by 26.5%, very strong momentum in high end iteration in semiconductor, in 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 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 a price of campaign as well. Very good execution of some operational adjustment with Chief of Production from the Netherlands to Romania, which is allowing us to be more cost efficient.

Last but not least other conveyor belt there as well, record sales actually for the first six months which is mainly delivered on the back of a very strong demand from OEM manufacturers. So the projections for the deal for the foreseeable future is that what moment we do not see any specific reason why this brand 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 will continue capturing the momentum that we see in advanced hydrogen electrolysis. And for the combustion business the shift towards more in friendly environment – environmentally friendly burners will continue and this will allow us to further capture some of the opportunities in the market.

Last but not least BBRG, so top line growth of 13.4% there as well from the back of a very strong pricing realization, some positive coming as well from the ethics 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. 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 training activities with Russia. Other region where the business is present is LatAm and there we continue to see a very strong model.

In Advanced Cord, 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 €223 million, that's €26 million increase versus last year. Main contributor is obviously the EBIT performance, but as well, some intermediary lines like the other financial income, which is quite [indiscernible] the proceeds generated through some of our financial instruments. We do see as well an improvement from the income tax. So we are reaching a record low level in terms of ETR mainly resulting from the usage of some different tax assets.

So one of, so to speak this is not the performance that can be repeated. 20% is not a normalized ETR. We have already discussed our expectations in terms of the 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 result of the joint ventures and associate slightly below 2021 but still a very strong €29 million on the back of 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 the balance of, 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 account receivables and as far as the inventories is concerned, so there's 60% of the increase which is associated with the why ropes prices, certainly higher value of our inventories. 40% is related to increases in tonnages and there are two 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 the other would be actually working on them to further optimize them for the balance.

Some key figures per shares, and there the relevant figure and Oswald has touch on that is the very nice step up that we are reporting for the EPS at €4.60. 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 will know that we have initiated the program back in 2022. The first two trenches of respectively €20 million have been completed. The last one have been completed and has been completed on the 22nd of July. We have re-launched the third tranche of the program today for another €30 million and will be canceling incremental shares that will be acquired during the balance of 2022.

Outlook, I'm – 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 to be reading in a crystal ball if we want to be – to provide more precise guidance. I think that the key message for us is that we are conscious that we continue navigating in a complex environment. There are some class which are accumulating in the horizon. The situation might eventually become even more difficult in the next six months. However, we do think that we have brought the demonstration that we know how we can manage this time of challenges.

We are implementing contingency plans. We 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'll make sure that we tackle them in a structured way. The pricing discipline is there to stay. It's not something which is punctual. We continue to further leverage on that and we will continue looking at it actively at our portfolio management. So that's how we see the situation. So the organic top line growth were that we have provided the guidance during the first half. I think that again, because the environment is not 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 delivered on the guidance that we have initiatives provided at the end of Q2.

And now Katelijn back to you.

Thank you, Taoufiq, and Oswald.

We now start the Q&A Session with our gathering analysts. When you have questions, please raise your virtual hands and when invited unmute your microphone, turn on your camera, please identify yourself and raise a maximum of three questions per round. We will organize as many rounds as needed.

I see that Emmanuel has already raised his hand. So please shoot. Emmanuel?

Yes. Hi. Good afternoon. 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 rods pricing is evolving? So that's the first question, a bit more clarity on how you think about pricing in second half?

Yes. So, I mean, again, all statements we will make are working assumptions, which can evolve significantly along the way. So what we have seen in terms of wire rod 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% – 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 three 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 banking 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 depending some region, but…

Yes, 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 massively, but there is a decrease, which is already noticeable in…

Absolutely. But I think it's not only viable what which we are watching. It's also the other ones on energy, in 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 same in other areas. But it's really about also what is the stocks, what is the inventories, there's having demand coming back, maybe we see it 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, the wire rods.

And if it happens, it will be gradual. It will not come one shot. It will happen gradually over the next six months or five months after 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 it is referring to. There's always a time delay or a shift…

Yes, that's clear. Thank you. 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 would it result in?

Well, there are different type of structural 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 of our fixed cost. So this will maybe rely on some self-help measures that we have already executed on in 2020 during the COVID crisis. We will duplicate some of these measures. We will also look at cost savings 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 global 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 the specific aspect.

Okay. Thank you. 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 [KBC Securities] to raise his questions. Wim?

Yes. 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 thirdly, also with regards to China, there is 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 one 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. Thank you.

I'll take the first one, yes, and as Taoufiq was explaining building products is one – even it's not the majority of our business, but they are on the highlight. When I look at this when we see, we have a plus 17 and if I call it 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 and it's – a lot it 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 is different opinions if there's a recession, the finance minister she said this morning, it's not a recession, it's maybe – 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 costs.

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 very limited. 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, PPI 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 elevated, slab is just show there is an increasing awareness. Let's just take off and on, there is a slight switch but is constantly growing. We have done the basis, we have done the prices, we have look, and I think there were some, I would say, special buying 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 increases coming that was people replenishing their inventory, because when you take an overall plan, I would say, Europe – America, we want to increase our footprint. India, I think we get, I would say, quite some good feedback. India is anywhere a country I would like to focus much more on because there's a slower growth, but a constant growth. When you look there, like also in rubber reinforcement, with the radialization what's going on, I think it's a promising market. It takes maybe a little bit of time since coming back to China, it’s a little 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 fiber, it's really a structural ramp, as one of the key hurdles that we had to deal with some extent, still need to manage in the short-term future is the adoption, that construction is a very conservative environment, so they want proven solutions. And when you come with something 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 a final 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.

Yes, with the regulation norms and the go to market where we're really focusing on is the most crucial actions because the prerequisites, the environment is the structural adoption is there, but 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 establish – yes, last year was an amazing year and it's in human life not every year we can have an amazing year. Yes, the volumes were down. You mentioned about the contract. I think the volumes were 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 loss, I would say, of political topics that you had a lot of elections there and people were waiting what happens more left or more right, what does this mean for interest for taxes, et cetera, in this way. But I think we still have a very solid commission.

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, as in from comparison to 2021, I think, yes, it's absolutely softening less volume, but it's not the loss of the market share when market went small. But when you look on the years 2020 and 2019 backwards, I think it's still on a reasonable level, very good, yes, very good, yes. Because Win we also talked about the logistics and all, what's coming from outside. 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 shifts curing out. This has not the -- the demand is lower. 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 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 inconsiderate 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, we touch on some of them. So we might have tactical bolt-on transactions associated with that and the 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 SPP program. So when we launched it, we stated that, we are not ruling out the possibility of doing additional SPPs. 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.

Okay, very clear. Thank you and congratulations to good results.

Frank Claassen [Degroof Petercam], the next.

Yes, good afternoon everyone. 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? Thank you.

Oswald, I will take that one.

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. So, currently, if we look at the base of inventory, we normally operate around 60 days of inventories. These 60 days have increased to 90 days by the end of June 2020, so a quite sizable increase. This is something that we have somehow 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 created some safety stocks, and we have also rebuild the inventories, which were significantly beaten 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 biweekly basis almost, so something which is clearly on top of our agenda.

Again, it has increased as a percentage, working capital at 15% is not outrageous. 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 challenge. So on the energy crisis and the hedging, so the approach is very much differentiated by region. So in China, we cannot do 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 the recharges. 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 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 infected next year because, and that's the reason why we prefer to have hedging through our contracts and to index them through our contracts, because it allows us to translate the real increases that we see in our markets through our end customers. So the hedging is a compliment, a tactical tool instrument, but we focus more on translating the prices in our – the increases in end prices.

And this one Frank, we take huge effort from the sustainability point of view to reduce the energy intensity. We run currently over the last month’s [indiscernible] how we can take our double-digit percentage the consumption of energy and this we did start before anybody was thinking about the energy crisis. So it's both really one is the commercially effect how we can pass it on, the other effects how can we reduce less? We have a solar – just a solar we did in – we bought early 2023 and all this we have in India, something, there's a lot of activities going on. We build a lot of intelligence in our machines to steer much better energy consumption. We are really digitizing in, of course we start always with the biggest plans first to better, it becoming better and to really say, how can we, in the process flow optimize 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 [indiscernible]. In China, China is special when you look for, and we had many video conferences with our colleagues for the three 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 release. I learned that maybe China has seen this tough lockdown in Shanghai, maybe it’s not as the best solution, this is what we also see. Our plants are currently running and we have just closed two production where people have been sleeping and working and eating there, this gone all over the place. 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 bottom out, because what was produced was out of existing inventory of existing. I would say there is a need now to replenish it. And when does it start off? Will it go up to the original hype? No. I think what in our plan is that there's a kind of modest recovery from this very, very, very low.

The second thing is what we need to understand in China. When you look back in the last 25 years, China was all about coal, coal, coal. This was somehow the mathematics of China, how it was developed and this comes to an end. And we see that you know our competitors, they have announced the coal, coal, coal, like they 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 gave an important warning, some of them are mentioning losses. So I think there will be a rethinking if really new capacity will be necessary because you will not get the value you aim for with all this intensive CapEx – intensive capital business.

The first one is we have a main chart of truck tire business in our tire business. You can say 80%, 85% of our exposure in China is after reinforcement and with the stimulus package we see now coming up, I would say this is one of the latest infrastructure is always the first one to come. Yes, it will not be at the heat, I would say what we have one experience, but I think we are bottoming-up. The good thing is for us as we have areas like, I think I mentioned it in India where we are really exploring and see their seats are coming in the right way. Of course not on the very short-term and that we in Europe have still a very solid and strong demand, and the balances is strong, and of course our aim is to come to those heights, which we have always been aiming for. Frank, we cannot escape the environment but all what Taoufiq has nicely described and what we can do with self-help measures. This really will be a take from me. Other things which are not under control is always difficult to see or to forecast.

Okay. Thank you very much.

And I will invite Stijn Demeester [ING Financial Markets] to raise his questions. Stijn?

Yes, yes. Good afternoon. Thanks for taking my questions. A couple of follow-ups, three if I may. The first one is in again, 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.

Yes. So we have an average of three 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 art of work heading through. Overall what we do see currently is our order book are quite strong. We are growing in many areas specifically the low carbon concrete businesses for instance. We mentioned hydrogen, we mentioned offshore fleet markets. And we are expanding our positions as well in [indiscernible]. So, I mean, there are several indicators where we do think that provides a reasonable visibility on how the things might be trending. I mean, the big question mark is a little bit associated with the pricing elasticity discussion with the prospect of the demand in places like China and Europe with the prospect of recession. So the combination of these things are all risks which can heal some of the visibility that we have. So that's why, I mean, again, in a normalized environment, I would have told you okay, three months, it's this amount, this is the percentage that we're expecting. It's just too difficult currently with the volatility we're saying to be able to commit more firmly on any specific figure.

And can you commit on Q3? Or is it mostly the fourth quarter that is sort of warring you?

Well, I mean, the second...

Not that I want you to – not that I want you to commit something on Q3, but is that – is that sort of the visibility you have today?

Well, I mean, the plan that we have is, I mean, we do – we do forecast for full year, and then it's a six months forecast. It's something that we review on a monthly basis. The second half of the year is a kind of peculiar period, because I mean, you have less working days, you have summer breaks, you have shorter months in December, you have seasonality impact on some specific applications like constructions for 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 sales and EBIT we're 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 net bracket?

Well, I mean to answer on 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 if I remember correctly, second half would be – which were a bit peculiar because we were COVID pandemic. But the expectation is that second half will be lower in profitability compared through 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 volatility which is becoming higher than what including we have gone through during 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 [indiscernible] price to decline by 20%, what would be the associated fee for impact in the second half? Can you give some, yes, building block here? Is it the full reversal of the last year's I guess it was in absolute terms €40-ish million – €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 margin, that's obviously a big force here?

Yes, ballpark we're expecting a reverser of the first half impact that we have seen. So a decrease, therefore a negative FIFO 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 too wrong when we started projecting FIFO actually, 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 will erase most of the gains that we have seen during the first half. We have already started seeing a decrease and a negative FIFO for the first time in the year in the month of June. So although it was very small we still had a decrease in a negative FIFO.

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

Historical what's your baseline because, I mean, as I said, I mean, in 2021 we had the 50% increase of the wire rods first half of 2020 to 20% versus the position of [indiscernible], so on an 18 months period there's a 70% increase of the wire rods prices. So assuming that the 70% increase will be erased in the next coming year, we do think it's clearly not possible.

No, no, no. Sure. But...

There will be – there will be some balancing the demand will probably ease, but again it's still very difficult to assess whether the stimuli programs and the tension that it will generate on the still demand will trigger massive evolution in one direction or the other. So, I mean, again it's very difficult to answer your question. I don't know [indiscernible] you have a more accurate answer.

No. I think, [indiscernible] anywhere especially because I think we have to look on sales. We have to look on both the ability, how much is priced, how much is in the inventory but when is the impact. It's really, I think a very – it's more on the prices. And of course say once we are of course, when we say this would be easing, it would be going in – 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 a 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 reflected, this is the challenge we see and this is where it's very different from region to regions as well. How this is in Europe? It’s a little bit easier. I think India is also, okay. China hopefully goes up a little bit upwards, but of course let them – will be not come back to this.

I don't know, I'm saying just from the mechanisms 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. So there are really a couple of factors that need to be modeled 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 a price upward of or downward is happening at the moment it is reflected in the price and that's an average of three months at least.

Okay. All right. Okay, good. Thanks.

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 – on that segment. Could you may be 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 with that?

Well, I mean the hydrogen as you know it's first of all associated with technology that we started developing 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 cells have quadrupled in 2022 from the mid-single digit last year. And we do see a kind of exponential growth when it comes to this specific segment and application. So we have very 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 prospect when it comes to hydrogen. So this is obviously to bring 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 would only have TSAs are changing upward or regular basis. So it's really booming very fast. So it's going upward on almost a constant basis, and yes, this is where we are.

Okay. And if you – if you look maybe a few years out so let's say that you generate around €20 million in sales in 2022.

Could you move towards €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 margin it is very important. So now our scenario is that we should move in the range of €100 million by 2025 and from there there's an exponential growth which is expected.

May be Emmanuel it has to complement on this one. I think the demand situation is really accelerating. We get, say periodically a higher demand forecast. It's very put on the right technology as well. There are mainly two technologies there. We are 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 pre phase, but what you see in all everybody's partnering with somebody is we do, because everybody is convinced that this has in fleet for years a significant take-off of in this area, there's a broaden effect. Hydrogen is all about there's one technology which cannot reuse renewable energy and the technology we are looking at is they can take green energy, and I think this is also very big differentiate.

The key topic is how fast the costs can go down? And this is always compares to fossils. When you look and with the current, I would say gas price, whatever it is, hydrogen gets more and more, let's get somewhat attractive and I think this is also, there are some people may say, can we go faster than before? And we have only – only on hydrogen we have also in the BCT and Taoufiq was mentioned, we call it environmentally friendly burners, which have – we have 20% of our products can already used 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 fields 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 in. Today they live out of our – I would say our wire and fiber business. We deliver this membrane, membrane is cold then you have the catalyst. And I think what we are currently – we can do maybe coding by ourselves. We can do more and more. How can we really more integrate it? What is the field of play we could offer here in this markets? Not only the membrane and I think this is just a logical way, what we always say in their chasing areas going 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 here. We have a lot of different capabilities going on and the way we move forward Bekaert SA [indiscernible] and hydrogen is one of the area where we have an absolute small capability, especially because the markets will come.

With this gentlemen, thank you. Ladies and gentlemen, thank you for participating to the analyst. Thank you for the interesting 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.